How to - Survive the financial crisis (GFC)

This post will provide a number of simple tips (in order of importance) to help small businesses survive  the current financial crisis. The main piont is that the financial crisis is short term and that by surviving it your business will be stronger over the long term.  

Tip 1) Cash is the number one survival tip

Cash flow is the life blood of the business world, too survive small business needs cash. There are many examples of profitable small businesses who go out of business because they have a short term cash problem.

The following checklist is designed to ensure you have enough cash to survive.

• Go to the bank and organise a line of credit just to be safe. This must be organised before you run out of cash.
• Keep a close eye on accounts receivable. Companies use accounts payable as free credit and therefore will delay payment. Chase outstanding debts early. If a customer value your product or service they will not have a problem meeting your payment terms. If you have a small number of customers this activity becomes even more important.
• Offer discounts for advanced or early payment . A simple Net Present Value (NPV) calculation can provide you with what your accounts receivable (debtor balance) is costing you.
• Use payment terms offered from suppliers, as pointed out above its free finance.
• Increase the limit on your business credit cards, avoid using credit card debt because of the cost but they can be useful in emergencies.

The key point is that you need enough cash to pay your debts when they fall due, if you don’t nervous creditors (especially banks) will have no hesitation in bankrupting you.

Tip 2) Spend time on your business not in it

Small business owners often get tied up dealing with the day to day running of the business and do not dedicate enough time thinking and planning about what they want from there small business.

Below is a practical list of ways you can spend time working on your business.

• Develop a business plan, the process you need to go through in a business plan gets you to think about your business in a reflective way which helps you identify areas for improvement.
• Formulate a strategy for the next 3 years, I admit a static strategic plan is of limited value becuase they represent the situtaion on the day they were created and tommorrow everything may change. I like to do a strategic plan on an intranet site that defaults as my staffs home page and update the plan with input from staff regularly. The strategy should address the following areas.   (I will create detailed post on creating strategy for small business). 
  • What are your personal goals?
  • SWOT analysis - Strengths, Weaknesses, Opportunities and Threats.
  • Competitor Analysis - what are you competitors doing? - mini SWOT on each of them.
  • Customer Analysis - who are your customers?; why do they choose you over the competition?; How should you approach them
  • This leads to number ways of competing  
    • Compete on price - lowest cost, deepest pockets generally wins
    • Compete on value - this involves developing a unique position in the market and creating exceptional value
    • Compete on quality - works in premium markets
    • Compete on service - works on customer convenience
  • The key to strategy is that you can not be all things to all customers you need to focus on where you have a competitive advantage.

• Formulate a marketing plan for the next 12 month. At Style we help small business develop marketing plans and one part of our strategy to add more value to our customers.

Tip 3) Financial crisis can be viewed as an opportunity

The current crisis can be seen as an opportunity to go into new or different markets because competition is reduced or the landscape has changed.

There is a concept in economics from Joseph Schumpeter called “creative destruction” it describes how during hard times is when opportunities arise. The problem is you need to see above the current crisis to view the opportunities. 

A few examples

Join forces with one of your competitors, when times are good and both companies making modest return neither would be willing to join forces. The result of a properly designed merger should be increased economies of scale resulting in better returns for both parties.

New position in the market becomes available for a new product or service.

If you have the funds invest in new technology and infrastructure now. Resources are available and cheaper at the moment. When the good times return you will be well placed to ride the wave with your new technology or infrastructure. Also locally in Australia the government has provided some significant tax breaks.

Perfect opportunity to negotiate new deals with supplier for long term contracts and lock-in lower costs. 

Re-negotaite a reduction in rent becuase your landlord will be keen to keep you, this may be difficult.

Tip 4) Drive revenue up

Increasing revenue sounds obvious but most small business focus efforts on cutting costs which actually drives revenue down because costs drive revenue. Now is not the time to cut on advertising, marketing, exhibitions and sales staff because all these costs drive revenue.

At Style we can help you with your marketing.

Tip 5) Cut costs that don’t add value

The focus should not be on cutting costs to maintain a profit or break-even level because this type of short term cost cutting is the beginning of the end. The following is examples of costs I would be careful in cutting.

• Staff costs - for small business staff are the key. If you need to reduce them why not ask each of your staff to cut back 1 day a week. This works out better for staff and the business.
• Advertising costs - if anything I would be increasing as long as you can gauage how effective you advertising spend is - topic of another post
• Marketing costs - drive new business
• Customer service - drive repeat business
• Quality control - maintains quality
• Production costs - maintains quality
• Training costs - keeps resources productive

That does not mean that you should not be looking at each cost closely asking what it adds to value in the final product.

Costs which should be looked at closely

• Telephone expenses
• Technology expenses
• Motor vehicle expenses
• Finance costs - if you have security now is a gret time to secure low rate finance.
• Travel expenses - although careful with this

Hopefully this practical list of tips is useful and if anyone has any additional suggestions I would like to include them.