Stress Testing Can Strengthen a Business (Part 2)

In the aftermath of the GFC and recent natural disasters, I believe many Australian SMEs have a unique opportunity to prepare their businesses for inevitable tough times ahead.

Those businesses who adopt a proactive approach will emerge stronger and better equipped to take advantage of future growth opportunities.

In part 1 of my blog  I explained how stress testing a business can help you to avoid business failure.

In this blog, I’m recommending that directors undertake a detailed review program:

Strategic Review

 A robust strategic review covers all areas of a business, including internal operations and market position, identification of key issues facing the business, potential risks, their impact and available mitigation strategies. 

It should also include a review of products/services offered, focusing on gross profit contribution by both product and customer and an analysis of product range and geographical reach. A SWOT analysis including detailed competitor review is recommended. 

The results of the strategic review should be used to update your business plan, which should incorporate revised 3-way integrated forecasts (profit and loss, balance sheet and cash flow).

With credit rationing still an issue and general uncertainty as to the extent of the knock-on impacts of the recent weather events, financiers will be channelling their funds towards those businesses which can demonstrate a lower risk profile than their peers.  An up to date business plan and forecasts will go a long way to gaining the confidence of those financiers.

Financial Restructuring

Directors should consider reducing debt through non-core asset sales, tighter working capital management and equity injection and implementing tighter operating cost controls.

Companies with higher cash balances will be able to secure significant discounts from suppliers in exchange for speedy payment.

Work on strengthening financier relationships – implement rolling 13 week cash flow forecasts, 3-way integrated forecasts and KPI dashboard reporting, and provide these to stakeholders to secure their continued support.  Also consider licensing IP to maintain a low gearing ratio and don’t be afraid to reduce dividends to preserve cash.

Operational Restructuring 

If sales are expected to decline, consider bringing outsourced activities back in-house to provide alternative employment opportunities for existing staff and avoid costly redundancies.

Or, depending on your circumstances, consider outsourcing current activities to take advantage of the one-off cash flow benefit provided. 

Implement a lean manufacturing philosophy to reduce wastage within the business and review factory layout to identify better product flow configurations.  Consider reducing the layers in your management structure to cut costs and increase decision-making efficiency.

Merger and Acquisition

There will be a high failure rate among businesses who do not adequately prepare for the knock-on impact of recent events.

This presents a good opportunity for those businesses that are able to use vendor finance to fund acquisitions of competitors in distress and consider merging with a similar sized competitor to gain critical mass. Or simply wait for competitors to falter and purchase their business out of Voluntary Administration or Receivership or at auction.

Innovation 

Innovation is critical to capitalising on the weakness of competitors in the one to three years following a significant event, be it a recession or other disaster.

Continue R&D spending on new products and services. It is better to be launching a new product than having to discount an old one. You will achieve better margins.

Considering the significant business improvement opportunities available, I believe directors need to ensure their business undertakes a program of continuous improvement, focusing in particular on R&D.

This stands them in good stead to take advantage of future growth opportunities during the continuing economic recovery and environmental disaster rebuilding phase.

Daryl Wright (FAICD) is managing director for the Victorian practice of national business turnaround and profit improvement specialist Vantage Performance. Vantage won Turnaround of the Year (2008, 2009 and 2010) for its work with underperforming companies. This blog is adapted from an article Daryl wrote for Company Director, the magazine of the Australian Institute of Company Directors.