How healthy is your business? In these tough economic times being able to answer this question with confidence is critical, so I thought that I would take a break from tax this month and look at some general questions anyone running a business – large or small - should consider.
Have you prepared a cash flow forecast for the next twelve months to predict the cash you will need to run the business and to satisfy yourself that you will be able to operate within your agreed bank facility? Have you considered the effect of income falling by ten, fifteen, twenty (or more) percent to see the potential impact on your cash flow and working capital?
Have you looked at all of your overheads to see if any can be reduced, or identified alternative suppliers? Is there anything that you can outsource to reduce costs, for example payroll? Do you know the financial contribution made by each part of the business and are you confident that all sales are genuinely contributing to cash flow? This can be a very sensitive issue and one that is often best addressed by asking someone independent of the business – your accountant is ideally placed to do this - for a view. Are your prices competitive and do you actually know what your competitors are charging?
Is your funding secure and do you have a good relationship with the bank? This is probably the single most important issue currently facing many businesses: a reduction in the facility the bank is willing to offer can spell disaster and some banks are now actively reducing facilities that they were delighted to offer a year or so ago. Banks are not the only source of finance: have you considered additional sources of funding such as leasing, hire purchase and debt factoring?
Could you safely sell any assets to raise cash? Do you think in terms of cash flow as well as profitability? The two are not the same and there is little point in driving sales to increase profitability if the business will have insufficient working capital as a result. Are you invoicing sales as quickly as possible and chasing for payment to convert paper profits into cash? And finally, have you made time to review your current strategy - and does everyone in the business know what it is?
There are many more things to consider.
An impartial, independent review by a Chartered Accountant should leave you in a
far stronger position to weather the economic storm.
