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Westpac Beyond Survival #7
Business survival in the 21st Century - Seven key areas of failure
by David Dandie - Westpac Bank
 Managing your business
Managing a business is constant, demanding and time consuming. The trick is to channel your energy into the right areas so that your business will be prosperous. Identifying what areas to concentrate on is hard and because of this many find it easier to do nothing at all. There are seven key areas in business that should be managed, monitored and understood to ensure long term success.
1. Plan Properly
It is important to plan in your business. Many people open and shut the shop door each day without any real direction year in year out. They get dragged along by their business wherever it takes them. Sometimes this can be in a good direction sometimes not. A plan is a living document that should be updated regularly. It accounts for the growth in your business and helps you obtain the lifestyle you are looking for and not the one you have to take. It highlights the strengths and weaknesses of the business and the areas that need to be monitored regularly to obtain success.
2. Understand and monitor your financial position
Tax returns are prepared several months after the end of the financial year. It is only then that many businesses know if they have made a profit or a loss. Understanding your key performance indicators and monitoring these regularly is the key to early detection of problems and ensures the timeliness of good management decisions. It is far too late to correct the problem after the end of the financial year but not too late to start looking at the next trading period.
3. Understand the relationship between price, volume and costs
How do you know that you are going to make enough sales to cover your costs this year? Do you know how much out of every dollar in sales actually hits the bottom line? If you drop your price to match a competitor how many extra sales are required to compensate for the price reduction? How many sales do you need to generate to make a certain profit? How quickly do you react to a change in cost structure and what effect does this have on your business? By understanding the relationship between price volume and costs you can assess these questions and more.
4. Management of cash flow
It is important to understand where cash can get tied up in the operations of your business. Efficiency in debt collection and stock turnover is imperative to keep cash flowing through your business cycle. By completing a cash flow budget you can address cash availability over a given time period, predict lending requirements in advance, understand the effect of seasonality on the cash flow in your business and this list goes on. One of the best reasons to complete a cash flow budget is that it allows you to predict the future and helps you sleep better at night knowing that you are prepared.
5. Manage your Growth
Manage the growth of your business so that it doesn’t trip you up. Growth brings about many changes in all facets of your business and most of these will place a drain on available cash. Many businesses experiencing rapid growth collapse because they cannot generate enough cash to support their growth. If a business is going to grow at a fast rate then it will require a capital injection to survive. How much capital needed is the question and this is addressed in the Beyond Survival Workshop.
6. Borrow Properly
Don’t use your overdraft to purchase long term assets. The overdraft facility is provided to cover every day expenses of the business and to carry you through the quiet times. Long term assets such as cars, buildings, renovations, machinery etc. should not be financed by the overdraft but with a long term loan which has regular repayments. Long term assets create core debt in the overdraft and ties up available cash.
7. Manage your Transition
If you wanted to exit your business today there are three key ways this can be done. The first is to sell, the second is to hand it on to heirs and the is third to liquidate and close down. Of these three choices which one requires the least amount of planning? It is liquidation. Of these three choices which one will bring the least amount of money? Again it is liquidation. This would indicate that it is never soon enough to plan for the transition of your business.
Many operators plan to sell their business when they reach approx 65 years of age, retire and live happily ever after. How long will a business sit on the market for? One day, one week, one month, one year or forever. It may not sell at all, which eventually means liquidation and if the business is the operators superannuation or retirement fund then they may not achieve the retirement they deserve or planned.
Transition is constant and starts from the day you open your business not when you are ready to retire. The good news is that if you work out what you want from your business, put in place the steps to achieve these objectives and manage it correctly over time it is more than likely that you will obtain the lifestyle and retirement you are looking for.
The Westpac Beyond Survival Workshop concentrates on all of the above areas of financial management and more. The workshop takes financial information that is perceived to be difficult and explains it in such a way that every one can understand. To date over 5,000 business people have attended the workshop with over 90% of participants rating it as excellent and good value received. Workshops are regularly held throughout Australia and New Zealand.
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