CPA Australia in conjunction with its Business and Management Centre of Excellence and the Corporate Sector Advisory Committee have developed the following short list of tips for chief financial officers to consider, and possible actions they could take to help steer their businesses through the economic downturn. Strategy is key, and the organisation will be looking to the CFO for leadership on finance and accounting matters that are critical to business success.
1. Develop a financial model for your business – Develop a simple spreadsheet financial model for your business around its key operating metrics (e.g. revenue, costs, cash, inventory). ‘Plug and play’ with different scenarios to understand the potential impacts on the viability of your business of these scenarios. Develop contingency plans accordingly. These plans could include reducing costs and inventory, cash use minimisation, sourcing additional funding and seeking short-term revenue boosts through discounting, for example. If you do consider discounting, your modelling may benefit from a margin and pricing sensitivity analysis, as it is critical to understand this relationship, especially now.
2. Keep your financial records up-to-date – Ensure your financial records are up-to-date and possibly produced more frequently, particularly your cash flow statements and forecasts. The importance of cash flow and using reporting and forecasting to manage it can not be overemphasised. When business was booming, monthly reporting and forecasting of cash may have been adequate. However, weekly or more frequent reporting may now be required.
3 Review government responses to the downturn – The policies that governments are currently implementing could have an impact on your business, particularly the demand for your products or services. For example, taking advantage of cash handouts to individuals and tax incentives for capital investment by business may be an opportunity for your business to run promotions that align with these government responses. You should also factor in tax incentives around business investment in your capital expenditure budget and possibly amend your future growth plans to take advantage of other government stimulus spending (such as on infrastructure). It is also time to review how your business manages its tax affairs, as it is very likely that with significant government deficits, there will be pressure to raise government revenue through tougher compliance activity.
4. Keep your bank and your investors in the loop – The sooner you talk to your bank about any problems your business may have, the more that can be done. In other words, secure funding options before you need them.
5. Watch your prices and those of your competitors – Take a more pro-active view of your pricing approach and that of your competitors. You do not want to take a pricing position that means you are uncompetitive, but you have to avoid pricing that may make your business unsustainable in the long term.
6. Concentrate on the profitable customers and products – Find out which products, services and customers are profitable and look at ways of getting rid of the non-profitable ones. Look carefully at the costs of acquiring new customers, and compare them with the costs of developing current smaller customers with growth potential.
7. Get the best terms from your suppliers – Look for improvements in prices and terms. For example try to extend your payment terms, review pricing, take stock on consignment and rationalise your suppliers.
8.Rationalise if necessary – Look at the products and services provided by the different parts of your business. Do you need to rationalise? What is generating the profits? Where is the growth? What do you need to add to meet changing market needs now and in the recovery? Ensure operational risk management is adequate to reduce the risk of productivity losses from poor work practices, fraud and other unethical or risky staff behaviour.
9. Look for possible acquisition and merger targets – If your business is strong, now is the time to become even stronger.
10. Know when is the right time for capital investment – Now may be the time to invest if the business fundamentals are strong, but turnover has slowed. Investment now may cost less, and the disruption and diversion of effort may be more tolerable to your business
11. Be aware of the legal ramifications of taking on directors’ duties – With many businesses under considerable financial pressure, businesses may turn to their CFO or external accountant to lead them out of trouble. Where the CFO or external accountant gains effective control (directly or indirectly) over the affairs and direction of a company, that is, they are the controlling mind of the company, and they exercise such control, they can be deemed to be a director of the company, even though they have not been validly appointed. They therefore become subject to the same obligations as a validly appointed director. In Australia this could mean being personally liable for insolvent trading and PAYG instalments not remitted to the Australian Taxation Office.
12. Take care of your staff – The GFC will be impacting on your people, so keep a lookout for signs of stress as the GFC affects them and their families and be ready to provide support.
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