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The Dimensions of Risk Management - Economic Downturn – Boom or Bust Part II

By Michael Vincent

26 December, 2006

The world economy alternates between boom and bust as a normal part of the business cycle.  The depth of a recession and the time to recovery, or boom dictates the severity of the downturn.  Last month I urged all businesses to undertake a survival audit and reinforced the value of cash flow.

 

Correct risk management involves being proactive and looking to the future, any growth should be from a firm base to opportunity, then consolidation and the cycle can then recommence.  During a downturn we must prepare for the good times and ensure we are amongst the survivors.  Some points to look at are:-

 

1. Your bank: Check the value of the relationship, are you valued and will you have access to a relationship that will be a key part of your survival. If not then shop around in the good times to set the basis for a sustainable relationship in the bad. In today's world it is not a bad thing to tender out the banking activities of a large firm or in the case of a small firm build more than one banking relationship.

 

2. Check stock levels: Be ruthless and assess the value of stock, it is a major source of cash to a business if reduced and managed under a good inventory system. It is fair to say that most businesses in the SME sector maintain stock levels approximately 40% higher than needed for optimal business performance. This may look good on the balance sheet but in a recession cash is more vital to survival. Remember if your business fails usually stock is worthless.

 

3. Review overheads: Carefully check all outgoings, firstly fixed expenses, what can be reduced or eliminated. It is simply amazing how much expenditure is incurred that is irrelevant to the operation of the business. Culling here will free cash for survival. Next look at the variable cost structure of the business and cull for survival. Care needs to be exercised that opportunities for recovery are not eliminated in this phase. Staffing is critical to survival and recovery, so to cut just to meet an ROI is to set the scene for long term shrinkage.

 

4. Debtor collection: Do not be a banker to other parties, enforce payment terms that have been negotiated, remember they may be using your cash to survive totally at your demise.

 

5. Value your customers: Customers are the key to cash flow and thus the key to survival, value customers and maintain service levels and you will be rewarded by loyalty beyond what you can value.

  

6. Ratio analysis: Visit you old accounting 101 text book and read the chapter on ratios and the value that can be derived from correct ratio and trend analysis. The main value is the cumulative direction of the trend.

 

The above points are basic business fundamentals and if correctly applied will set the scene for survival, there can be no guarantees in that but the application of business principles through a risk survival audit will give maximum opportunity to take advantage of the inevitable recovery.  This audit will also force you into identifying the core operations of the business and thus the parts that will assist a sustainable business.

 

 

 

About the Authors

Director

Australasian Risk Management Unit

Faculty of Business and Economics

Monash University

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