It’s said that a week is a long time in politics. In the context of business, a week can be the difference between a big smile and reason to celebrate to a furrowed brow with blood that is about to boil. Add four, five, six or even 12 weeks and your boiling blood is bordering on vaporisation. Worrying trends are emerging that are taking the life out of our small and medium businesses in Australia.
What are we talking about here?
Two ugly dynamics are coming to the fore:
- Time taken to collect your accounts receivable
- Downward pressure on your pricing Sound familiar?
Our economy has been a star performer for many of the years in our most recent decade, but the tide is turning. Some might say the tide has already turned, but I believe it’s still turning and there is way to go before we see an improvement in business confidence and operating conditions.
What’s driving this? Well, it’s mostly economics. Our largest trading partner China, is not experiencing the economic growth that it once was, which is having major implications for Australia.
Take as an example; we are hearing reports from our West Australian SME friends that they are being told by their customers (at the big end of town) in no uncertain terms to reduce your prices by a minimum of 15% … and our payment terms will be 90 days. No negotiation, just instructions. Like it or leave it they are being told.
With reduced economic activity, and many businesses vying for less work, if you do not comply with these requests, you will be replaced. Competition is on the up. This all looks like the big end of town throwing its weight around, and those corporate captains are making no apologies for it. What do we, as owners of small and medium businesses do then? Well, we’ve got to play a smarter game.
These challenges I believe, go to the core of our businesses. It’s time to redefine ourselves to ensure a prosperous future.
Downward Pressure on Pricing
Let’s start with downward pressure on pricing – what can we do to be more competitive and still be profitable? Please note, each one of the strategies below could be the topic of individual articles within themselves, so we are going to be summarised in style. Stay tuned for more information in the coming weeks.
1. Ask customers what they want, what they don’t want
Getting feedback from your customers is always important. It’s an opportunity to scope out what is currently required and not required. Removing part of the scope of works may be the answer to reducing your customers cost. It may also uncover other works that need attention. Set up a review of services and open the dialogue.
2. Negotiate with your suppliers
Let the price reductions go down the line. Your suppliers are also vying for your custom. Talk to them about your challenges and sharing the load.
3. Review your overhead structure
It’s time to take out the razor. What costs can be trimmed? Can you outsource certain functions for less cost? Outsourcing and offshoring is now more accessible to SMEs than ever before.
4. New markets
Is it time to redefine your target market? Can you operate competitively in your existing market? Are there opportunities outside of your traditional markets?
5. New marketing
The way we position ourselves is often misunderstood and neglected (that is, the messages we communicate to our existing and potential customers). Is the brand message of your business relevant to current business conditions? Does it position you in such a way that connects to the needs of your customers?
We are being asked to do more with less. This needs to filter down to your people. Are they as productive as they could be? Do you even measure their productivity? Do you set in place Key Performance Indicators that will drive your teams’ behaviours? Does your business have the culture required to perform at its best? Can you restructure their employment terms and remuneration to be more performance orientated?
7. More automation
We’ve seen huge advances in technology over the last 10 years and more is on its way. Automation offers greater consistency and lower operating costs. Of course, there is an investment with any technology initiatives. Those that choose not to become more automated will be left behind as technology improvements continue to gather pace.
8. Ask your team for help
You don’t always have to have all the answers. Get your team involved. They will come up with ideas that you won’t think of.
9. Get alignment
To make any strategy work, everyone from the bottom up must buy in. Without your team onside, it’s hard work. Be honest with them, ask for their help, make sure everyone is aligned to the cause.
Now let’s move onto the other major challenge -- collecting your accounts receivable.
The majority of Chief Financial Officers (CFOs) would advise you to not accept payment terms outside of your usual terms. ‘Be strong, don’t give in’ they’d say. But when competition is rife and the customer in question represents a significant proportion of your total revenue and are threatening to leave if you do not comply, what do you do?
Let’s assume you’ve exhausted all other options to negotiate better terms but they are not forthcoming. Let’s say you’ve made a strategic decision to comply. It’s the funding aspect then, of your business that you must address. Funding is often the most misunderstood financial concept in business. Your Profit & Loss report tells you you’re profitable, but you’re suffering tight cash flow. Why?
This is the first step – you must understand the dynamic between your profitability and your cash flow. In essence, your profit is taken up by the following five items:
- Growth in your working capital
- Paying your income tax
- Taking dividends from your business
- Capital expenditure paid from cash flow (not debt financed)
- Paying down debt
If the sum of the above five items is greater than your profitability, then you will experience negative cash flow. Conversely, if the sum of those items is less than your profit, then you will have positive cash flow. So the idea here is to review and ensure those items are being well managed and strategised:
Ensure your income tax payments are not in excess of what they need to be (link your quarterly tax payments to your actual business performance).
Develop a dividend policy that is thought out and adhered to. So often this part of business is not well designed. It might even be time to withhold dividends (accumulate & retain profit) to get your business funded appropriately.
Ensure you have a capital expenditure budget and put some discipline and planning around your capital expenditure requirements. Also, do you have excess assets that are underutilised and could be sold?
Interest rates have come down and it might be time to renegotiate your debt facilities with your bank. It’s competitive in the banking world right now and they are keen to retain and attract new business.
Growth in working capital
This is the funding item that is directly affected by debtors’ days increasing. The money you have tied up in this area grows and puts pressure on your cash flow. Can you negotiate extended payment terms with your suppliers? If on completion of a review of all your funding items and you find that you will still experience negative cash flow, you will need to consider:
- Retaining profits
- Capital injection (putting more of your own money into the business)
- Debt financing
- Improving profitability
Plan, Plan & Plan
Where to from here?
You would have heard it before – you must have a plan. Strategise and execute. The first step before all of that is to know your numbers. You must know where you are at right now, so you can measure the distance between there and where you want to be. Then you can build your strategies to close the gap.