Financial Analysis in a Downturn

-Steve Lefever
Business Resource Services

A companies struggle to reduce costs, find new sources of revenue and operate more efficiently they sometimes forget the basics.  Here are ten things every business owner should consider as part of his or her downtown recovery plan:

1. Stay on top of your cash situation: Take the time to prepare cash flow projections for the next 12 months and revise weekly if needed.
2. Know your key drivers and manage them: Keep a watchful eye on areas that affect cash flow: accounts receivable collections and inventory turnover.  How are you doing compared to past performance and your peers?  Watch key areas that affect profits, net and gross margins, labor and fixed asset utilization.
3. Monitor accounts receivables closely: Process invoices immediately, distribute an outstanding accounts receivable statement weekly and take action on late accounts immediately.  State with a polite but firm personal call and don’t get off the phone without a commitment to a payment date.  A few days improvement in collections will make a huge difference in cash flow.
4. Insist on good financial data: Accurate, timely financial statements are critical in tight economic times.  Don’t accept excuses.  Your banker will love you for it.
5. Get funding now: The worst time to get financing is when you are about to run out of cash.  Arrange for loans and lines of credit.  Your cash flow projections from the first tip will help you have to pay in back.
6. Review your long-term financing: Are you financing long-term growth (or assets) with short-term funding such as a credit line?  If so, see your banker about getting it changed.  With record low interest rates, everyone should look at refinancing now.
7. Have good advisors and use them: Make sure you have a solid team of outside advisors, meet with them regularly and listen to what they say.
8. Don’t turn financial decisions over to others: There is no need to turn yourself into a CPA, but you must be able to read financial statements, talk with your financial people and assess your company’s overall performance.
9. Understand and use Break-Even analysis: Do you know your contribution margin?  If not, you won’t know how much more you will need in sales when costs rise or prices fall.  At the same time you’ll know how much to cut when sales fall and analyze the need for expansion or capital decision.
10. Stay close to your clients: This will generate good will for you, give you a chance to spot new opportunities and provide an early warning in the event their industry isn’t doing well.

REMEMBER

Don’t let the fear of the future paralyze you now.  Get moving and do something!