KEY POINTS:
As the global economic recession bites, New Zealand business owners need to be planning how best to cope with even tougher trading conditions widely expected this year.
While it's important to remain positive in these tough times, you don't need to a crystal ball to realise we're all
facing a difficult year. Every day the media is full of gloomy reports on the economy, global financial market meltdowns, falling prices for primary produce and other products and services, declining retail sales, large cutbacks in building and construction, increasing business failures, bankruptcies and large-scale redundancies.
Of course, it's the big company failures and wholesale redundancies which hit the headlines. But you hardly ever hear about the impact on the many thousands of small to medium business enterprises (SMEs) which represent the backbone of our economy, and how they are being buffeted by the same waves of economic adversity that are sinking many larger entities.
Where large companies normally have their own accounting experts to help guide them through stormy waters, small to medium business owners generally have to rely on their own resources. So how do they best keep their heads above water?
Whether you're a self-employed tradesperson; a small retailer, chemist or dairy owner; a farmer, horticulturalist or rural contractor; you run a small design company or medical practice; or operate any other type of business, the universal answer is: managing cash flow - always ensuring you have enough cash in the bank to meet your business and personal obligations.
Obviously, that can be easier said than done. But you can plan to put yourself in that position by ensuring that you keep your accounting records right up to date, and by keeping close watch on how your business is progressing, not just in terms of sales and revenue, but also in terms of controlling costs, regularly each and every month, or even more frequently if required.
Similarly, you need to know how you are tracking in terms of profit or loss each month, as well as a cumulative tally for the financial year, and how those monthly and year-to-date performances compare to your budget.
If your revenue and profits are running significantly below budget, and you cannot trim costs to compensate, then you should probably adjust your forward forecasts so they remain realistic and viable.
It's also vitally important to monitor and actively manage your cash flow. Are customers paying on time? With the economic downturn, many will be taking longer to pay their bills, and possibly a lot longer if they themselves are struggling for cash. If a bill remains unpaid for two or three months, that's a sign of a customer with his or her own cash flow problems, which could transfer to your business if you do not chase them up. By not paying on time, the customer is really using you to help finance their business.
By keeping close track of all customers, you can build up a reliable debtor collection profile - which shows what percentage of dollars billed are paid on time or within 30 days, within 60 days, or 90 days or even longer. You can then prepare your own cash flow forecast showing when you expect those proportions of revenue to arrive, balanced against your own operating costs each month, as well as any capital expenditure plans, and the impact those receipts and payments will have on your bank account balance.
This cash flow forecast highlights which months can be expected to be in surplus, as well as any where a shortfall may arise and thus require you to seek extra revenue or temporary finance or overdraft facilities.
Having reliable reports of this nature are vital to help you not only keep on top of your business finances, but also to ensure you can make better, fully informed business decisions, and thus improve the overall performance and success of your business.
All of this may sound difficult, but some modern accounting software actually does make it easy for even the non-accountant to keep accurate, up-to-date accounts, and to be able to pull off reliable profit and loss reports, to prepare or adjust budgets, and to manage cash flow and finances.
Conversely, some accounting packages can be so complex that you really need to be an accounting or IT expert to drive them. I know of numerous cases where people have bought some well known branded software, only to find it was far too difficult and time consuming for their needs.
Some also found they needed to buy extra module packages for add-on features. Plus, many found their accountants had to spend a lot of time correcting unwitting errors in their year-end accounts, adding to the frustration, time and cost for the business owner.
Hence you need to look for accounting software which is not only robust and reliable, but more importantly simple to use and trouble-free, backed up by good support services just in case you need help or advice.
Your accountant or business adviser can probably advise you on a choice of accounting software that best suits your business needs, as well as your personal IT capabilities.
In addition, I strongly recommend that you discuss your plans with your accountant, bank manager or other adviser, as well as with appropriate business contacts, colleagues, family and friends. Their input can be useful in helping to launch your new enterprise, and in helping to ensure it can successfully ride the waves of economic challenges in future.
Grant Hewson is General Manager of Accomplish, a provider of cash management and accounting software.