How to Survive the Upturn

FF Fashion

Thu, Apr 08, 2010
AsiaOne
By Darryl Wee


IT IS widely believed that we are now through the worst of the economic crisis. Whatever the shape of the recovery - you, L or W - we know trading conditions will continue to be difficult, there will continue to be a lack of available finance from risk-averse lenders and we will face higher taxes.

Strangely, when the economy does begin to recover is when small and medium-size enterprises (SMEs) face their greatest challenge. Business failures at this time are not caused by poor sales or losses, but by not having enough working capital - cold, hard cash - to fund the next sale or the next increase in turnover.

One of the most common causes of business failure is 'overtrading'. This happens when, despite increased turnover and profits, a company does not generate enough cash for its daily needs. Being a profitable growing company means a greater need for finance. As turnover grows, stock grows along with the money owed to suppliers - which ties up increasing amounts of cash in these areas. So where do you get the finance you need to help you survive the upturn?

Picky banks

Banks are being extra careful about lending - reviews are more common and renewals are tougher. They are also demanding increased security or other guarantees and suggesting shorter repayment terms or alternative finance options like factoring (in which a business sells its debts to a third party called a factor at a discount in exchange for immediate finance).

Banks want more information, projections and plans more regularly. And if they don't like what they see or don't see what they expect, they are increasingly likely to withdraw facilities. So with businesses needing cash, or being able to demonstrate how they will generate cash, you need to ensure you have the correct information.

Given that we are coming out of recession, what do you need to think about? And what should you do differently? The simple answer is: nothing. The basics that apply in good and bad times are: good liquidity, good clients, being able to maximise profitability, and having a plan. Without good liquidity (that is, working capital or cash). businesses fail because they are unable to pay what they owe when it is due.

Enforceable contract

Cash is king. Do the simple things: chase what you are owed, bill quickly (even in advance) for the work you do, and negotiate good credit terms when you buy.

Ensure you have an enforceable contract and stick to it. Issue invoices quickly and maintain good dialogue with clients or suppliers that will help identify problems early. Look for signs of difficulty such as work slowing down, late payments, post-dated cheques or changes in key people. Trust your judgment and, if necessary in the case of clients, stop working for them.

Maximise profitability. For example, look at issues such as the customer who requires you to hold a stock of finished goods but does not purchase a lot from you.

Think of the finance cost. What are the interest repayments, for example? Could the goods be obsolete relatively quickly?

It is essential that you have a plan and make time to plan properly - you need to know where you want your business to be. You then need to ensure you have the resources to achieve this aim and that you can take advantage of opportunities as they arise.

Make sure you are not caught out by problems like withdrawal or reduction of your loan facilities by your bank. Regularly update cash flow forecasts. Talk to financiers or other creditors before you get into difficulty - keeping these providers informed builds trust.

Explore other finance sources

Invest time in exploring other sources of finance. Have a contingency plan as new sources are not immediate. Talk to other finance providers or explore other sources.

For most small businesses, financing is and has been straightforward: friends and family, bank overdraft or loan for working capital, and asset purchases all supplemented by reinvestment in the business.

Always look to establish the best debt structure for you and your business - there is nothing wrong with the basic principle of matching short-term requirements with short-term financing, and long-term requirements with long-term financing.

These models work and will continue to work, but there are other supplementary sources of finance.

Businesses needing extra capital could look to peer groups or to venture capital, which comes from two major sources: business angels or venture capital funds.

They put up money for shares - and they risk losing the money if the project fails. They will, therefore, expect to participate in the business success via capital appreciation. They are highly selective with their investments, they have a portfolio approach to investing, they participate in the business, and they need a way of getting their money back through an exit strategy.

An advantage of this type of funding is that angels are usually people who have built and sold a business; so they know how tough it is. They will understand your problems and may have solutions. They look for people they can work with - entrepreneurs who are passionate about the business they run, with a clear vision of what they want to achieve and how the business will be developed.

Finally: what are the key elements needed in a business plan? The bare minimum for day-to-day work is a cash flow plan. A full business plan that sets out your aims and how they will be achieved is also essential. This will help you identify the resources you will need - and how much leeway you have.

The full plan needs to address: your short, medium and long-term objectives; your team's training needs and issues; current financial structure; your market (existing products and new services); competition; marketing objectives; strategy for market/sales/financing; management (current and future requirements); forecasts and financial data; assumptions used; and future funding.

Put these basics in place and your business has a fighting chance of surviving the upturn.

The writer is country head of ACCA Singapore