Practical tips: boost income, cut costs and take control of cash flow

Once the pandemic is over, will we immediately return to economic prosperity and carefree times? Personally, I am not that optimistic! So, from a chartered accountant's perspective, I would like to outline how businesses and individuals can respond to a possible economic depression and soften its impact.

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Small and medium-sized business owners: safeguarding cash flow is essential

As the saying goes, cash is king! In a crisis, safeguarding cash flow becomes the foremost priority for business survival.

Increase income

Cash flow is simply money coming in and going out. Incoming money can only come from earnings, borrowing, insurance payouts or money others give us.

• Money you earn

Our customers enable us to earn money. In exceptional times, alongside continuing to provide high-quality products or services, business owners also need to do the following:

• Regularly review customers and their credit histories. For customers with persistently overdue accounts, or those affected by the pandemic or economic crisis, consider shortening or withdrawing credit terms, or even ending the business relationship.
• Review your contracts with customers to see whether they include clauses that protect you. For example, must the other party pay your costs, including legal fees, when resolving debt disputes? Do you have the right to recover goods you have supplied if payment remains outstanding? If these provisions are missing, add them as soon as possible. If you have no contract at all, put one in place promptly.
• Make a habit of signing an agreement with customers before starting any work.
• Make a habit of requesting a deposit from customers before starting any work.
• Make a habit of regularly issuing invoices and statements, and following up overdue accounts.
• For customers who already owe money, consider instalment payments or barter arrangements to reduce your losses.
• Find a specialist litigation lawyer familiar with bankruptcy and liquidation who can initiate bankruptcy or liquidation proceedings against creditors as quickly as possible to protect your interests.
• Money you borrow

Apart from friends and family, banks are another source of loans. You can apply to a bank for revolving credit or overdraft facilities to meet urgent needs.

• Insurance payouts

Contact your insurance broker to learn about cover for unexpected events. For example, many customers with business disruption insurance can receive payouts during the pandemic.

• Money others give you

Apart from family members who support us selflessly, potential investors may also provide money. Rather than watching a business you have worked hard to build become unable to continue, securing investment to weather the economic crisis may be worthwhile if you have contacts in this area.

Cut costs

Our ancestors put it well: to make money, you must increase income and reduce expenditure. Here are some details to watch on the outgoing side.

Suppliers: Try negotiating longer payment terms with existing suppliers. Also compare the market again to see whether similar suppliers can provide products or services of comparable quality at lower prices.

Landlords: This assumes you have been a good tenant. In exceptional times, consider negotiating a rent reduction or deferred payments with your landlord to minimise the impact of rent on cash flow.

Stock: Businesses should minimise stock and associated costs, such as freight, warehouse rent, warehouse staff, and warehouse health and safety expenses. Carefully review stock turnover and profit margins. Focus on products that sell quickly and deliver high margins, and drop those that sell slowly, have low margins or are likely to expire.

Employees: Good staff are hard to find. As an employer, first consider whether you can reduce employees' working hours or negotiate lower pay to get through the difficulties together. You could also offer more flexible working hours or locations so employees may be able to take another job to support themselves. Employers can use this time to strengthen staff training, particularly across different fields. Of course, dismissing some employees is also a last-resort option in difficult circumstances.

Fixed asset investment: This includes vehicles, machinery and equipment, office supplies and fit-outs. In an economic downturn, avoid fixed asset investment and expenditure wherever possible. If purchases are essential, consider leasing instead of buying, or paying in instalments. You can also sell unused fixed assets.

Research and development investment: For now, think carefully before proceeding.

Bank loans: If you have bank loans, compare interest rates at other banks and see whether you can negotiate a debt restructure with your bank to reduce interest expenses. Remember that banks tighten lending in exceptional times, so never rush into changing banks and refinancing without confirmation from the other bank.

Insurance: Review all your policies with an insurance broker to see whether you can cancel non-essential cover or increase cover without raising premiums.

Other expenses: Reduce spending on gifts, food and drink, and save wherever you can.

A reminder: there are 3 types of expenditure you should not cut during an economic crisis:

Advertising and marketing: Continuing to advertise and market during an economic crisis is crucial. It tells existing customers that we are still operating, while also telling competitors' customers that we are doing better than their current providers.

Legal fees: In exceptional times, you may face employment disputes, debt disputes and other issues, making highly skilled lawyers particularly necessary.

Accounting fees: A good accountant does more than meet basic bookkeeping and tax filing requirements. Most importantly, when you need help most, or even when you do not realise you need it, they can recognise your difficulties, alert you and provide the right assistance promptly.

 

During an economic crisis, survival is a business's sole objective. Businesses therefore also need to actively consider the following:

• Look to the government. It will introduce many relief and stimulus policies and subsidies, which can provide a lifeline for struggling businesses.
• Identify your business's competitive strengths and product advantages. Do not blindly follow trends.
• Identify the outstanding employees in your business. During an economic crisis, look for staff who are loyal, have potential and are willing to weather the difficulties with the business.
• Adapt your products and services wherever possible. Offer products and services that meet everyday needs, or move into industries unaffected by the economic crisis.
• Move into e-commerce wherever possible, so you can sell your products and services everywhere without geographical restrictions.
• Truly understand your finances. Consult your accountant or financial adviser more often to stay informed about your position and obtain valuable advice.
• Some heavily indebted projects need to be sold at a loss.

Well-funded business owners insulated from the crisis: seize opportunities cautiously

If your business is unaffected by the economic crisis and has substantial funds, what can you do at this time?

• With high unemployment and low staffing costs during an economic crisis, this is the best opportunity to recruit talent.
• This is a good time for you or your business to invest and allocate assets. It is also a good opportunity for mergers, or horizontal or vertical expansion.
• During the 2008 financial crisis, shares in many internationally renowned companies fell to bargain prices. Many shares have now fallen to similar levels. Of course, investing involves risk, so consult your financial adviser.
• If you lend money to others at this time, make sure you have collateral and a written acknowledgement of the debt.

Employees: increase income, cut costs and stay steady through change

I also have some advice for those earning a wage or salary. During an economic crisis, having a stable job is an enviable blessing. So—

• Avoid changing jobs or resigning to start a business if possible.
• Do your job well, help ease your employer's concerns, offer ideas and help the business get out of difficulty sooner. In doing so, you are helping yourself.
• Use more of your spare time to study, develop your skills and increase your value.
• Individuals also need to increase income and cut costs.
• If your working hours or pay are reduced, consider taking another job or starting a small business within your capabilities.
• Buy fewer luxury goods, travel less, sell unused belongings and cut back on unhealthy habits.
• If you are made redundant, try to keep a positive outlook. You can apply for welfare support while continuing your education.

These suggestions distil years of experience and research, along with lessons learned from past mistakes. Of course, I very much hope our worries prove unfounded and that, once this pandemic ends, the global economy immediately recovers and gets back on track.

 

About the author:

Bocheng Chartered Accountants was established in 2009. Its founder, Tony Su, is a Chartered Accountant (CA) member of Chartered Accountants Australia and New Zealand (CAANZ) and a Fellow of CPA Australia (FCPA). Tony has 17 years of professional experience, with specialist knowledge and extensive experience in taxation, tax audits, business planning and business advisory services.