Out With the Old and In With the New
As we say goodbye to the 2020 financial year, our opportunity to reflect on what we have learned or what we can improve on is tainted by an element of uncertainty as we continue to battle the fallout of COVID-19.
Many business owners continue to re-open and return to some form of normality while others still grapple with a restricted existence. For many businesses, now is the time to consider what opportunities may be available in the new financial year. Listed below is a summary of key areas that may assist a business owner make inroads into sustaining and growing their business throughout 2021.
Review Customer payment terms
For many businesses, maintaining adequate cashflow will be the key to their longevity through uncertain times. For businesses that operate on an accrual basis, ensuring customer payments are received in a timely manner will be the key to their cashflow concerns. To encourage the timely payment of accounts, a business owner may consider providing a discount for prompt and early payment. This may be a percentage of the total account owing or a set discount amount for paying within 7 days. Although a discount will reduce the turnover of the business, it does encourage customers to pay early and may in the long run reduce costs related to debt collection.
A further consideration for business owners is the use of periodical payments. Where a job may be lengthy or if a significant amount is required to be outlaid in materials and wages, a business owner should consider interval payments including:
Deposit
Progress payments
Final Settlement payment.
A progressive agreement outlining the expectations surrounding payment will ensure all parties are aware at the beginning of the engagement and also provide certainty to a supplier that they will receive a regular cashflow.
Review of Stock on hand
As part of our End of Year reconciliation for the 2020 financial year, many business owners will have completed a Stocktake to determine their value on hand. The completion of an annual stocktake not only ensures that values are reflected accurately in the preceding financial statements, but it also allows aged or obsolete stock to be identified.
The beginning of the financial year provides an opportunity where a concerted effort can be made to clear old stock at a discounted price or through promotional activities. Clearing old stock at a discounted price returns cashflow to the business and allows new stock to be purchased that will provide a higher turnover opportunity.
Additionally, reviewing stock on hand and their profit margins at the beginning of the financial year will allow a business to identify those lines or products that have a low profit yield and may be a discontinued carrying line. It can also identify areas of future growth where goods or products have become available to the market that can now be carried to satisfy customer needs.
Review Supplier Trading terms
For most businesses, long established relationships exist with suppliers for the supply of goods and services. Over time, supply contracts become complacent and the terms of trade may benefit from a review to ensure that the line of supply is competitive in today’s market.
Additionally a review of trade terms may also identify opportunities where the bulk supply of goods based on the prior year order levels and demand can be implemented to lower the unit cost price. This is particularly beneficial where there are standard orders or customer deliveries that can be supplied through a bulk purchase at a reduced rate. Both product and freight costs may be reduced through this arrangement.
Review financial facilities including overdrafts and loans.
With the reduction in the official interest rate in Australia and the continuing uncertainty in the economy, we have seen a substantial reduction in the cost of money. Interest rates have for most financial institutions continued to fall. This provides an opportunity for businesses to review their current financial facilities to ensure their borrowing terms are competitive and in line with the market.
Any reduction in the interest rate on lending facilities will reduce interest charges, thereby providing a positive impact to cashflow.
A further consideration for business is the use of a redraw facility. For many businesses additional cash funds may be held in a term deposit or an interest bearing account. The rate of return for these accounts is now minimal. Therefore there is an opportunity to maximise the return on funds in the short term by depositing cash reserves against loans and overdrafts where the interest rate is higher and then re-drawing cash funds when required. To utilise this arrangement it is imperative that business owners’ review their current facilities to ensure their loan structure allows for re-draw.
Review of Business Plan or overall strategy
In times of uncertainty and change, the primary focus for a business owner is survival. We ride the waves and do what needs to be done to stay afloat. Many owners have had to be reactive and adjust their business practices overnight to continue to trade while ensuring adherence to regulations.
Positively, many businesses have found they are easily adaptable and opportunities have arisen that may have never been part of the original business strategy or plan. Therefore the current environment provides an opportunity for business owners to reflect on what they have learnt and model their goals and long term plans to include areas that may have surprisingly helped get them through the worst of the wave.
This could be identifying a delivery service that was in high demand, the use of online platforms for sale and advertising their business, identifying an alternative line of supply that was readily available or even a new product that was in demand.
While the above list is not exhaustive, it may provide a number of key ideas that can be implemented with a minimal interruption to daily activities. The positive message for business to take from the pandemic is the opportunity for reflection and the ability to consider what worked and what needs improvement. Our hope for our clients is that this time is not the “new normal”, but rather a “temporary abnormal.” However, a business’s ability to reflect and adapt quickly will hold them in good stead for the months and years ahead.
Please contact one of our offices to make a time for us to meet with you if you’d like to discuss any of the above ideas.