How can SMEs improve financial management and risk management at challenging times

A small boat faces a storm

Warren Buffett once famously said, "Only when the tide goes out do you know who's swimming naked." In a booming economy, business management and financial management are relatively straightforward. During this prosperous market phase, enterprises often enjoy sufficient cash flow, but it is precisely at this stage that the underlying issues stemming from poor management can easily be obscured. When the economy experiences a downturn and the market environment declines, these previously hidden problems become glaringly obvious. Currently, many small and medium-sized enterprises in New Zealand are struggling to survive under the pressures of high interest rates, a high cost of living, and a sluggish market. In these challenging times, how can entrepreneurs effectively manage their finances and address risk management, swiftly adjust their business strategies to overcome difficulties, and enhance economic efficiency amid adversity?

Over the past three years, due to the impact of the pandemic, I have been occupied with providing consulting services on business performance improvement ("PI"), assisting companies in reformulating their strategies and financial plans to meet the challenges ahead. As an experienced CA and business advisor, I would like to share with you a few insights I have gained:

1. Do a self-assessment of your business:

There are many things that small and medium-sized owners in New Zealand need to do themselves. I often see some SME owners caught up in the daily grind, akin to ostriches burying their heads in the sand, unwilling to listen or actively explore and resolve their management issues. They blindly hope for a miraculous short-term market recovery, missing out on good opportunities for business restructuring. Self-assessment for a business is akin to a medical check-up, identifying the root problems. The self-assessment should include, but not be limited to:

a) Conduct a thorough financial analysis to comprehend the current financial position of the company, using financial data to evaluate the company's strengths and weaknesses.

b) Review the existing cost and expenditure structure and determine suitable savings and cost reduction opportunities.

c) Assess the profitability of your business and analyse the appropriate pricing of each product or service.

d) Examine inventory management: Inventory frequently occupies a significant portion of a business’s working capital and is susceptible to management pitfalls. It is essential to optimise inventory management promptly, address overstock situations, and maintain reasonable inventory levels.

e) Evaluate and review team structure and capabilities. Reflect on whether you or your current team possess the experience and skill for self-assessment and restructuring. Do you have the resolve to implement change? Would it be beneficial to engage an external experienced business advisor to aid in self-assessment and restructuring to improve management standards?

2. Cash is king; strengthen cash flow management.

Cash flow is the lifeblood of your business, and during an economic downturn, you need to ask yourself and your team:

a) Do you review monthly financial statements, including cash flow statements? Are you asking your team to prepare three- to six-month cash flow forecasts?

b) In the event of high interest rates, can the company repay the loan on time? Is it possible to pay suppliers, IRD GST, and PAYE taxes promptly?

c) Is the company accelerating receivables collection? Do you actively and strictly control your daily expenses?

d) Do you have a financial emergency contingency plan in place in case of a shortfall in funds? Can you arrange alternative sources of financing?

3. Enhance risk management:

To avoid being the one “swimming naked” during an economic recession, it is essential to conduct risk assessments and formulate emergency plans and risk mitigation actions.

As an independent director and chairperson of the finance and risk control committees for several organisations and companies, I often remind management to have a risk management mindset in daily operations and ask multiple times, “What if (things go wrong), what would happen?” For example, how should companies manage market risks, financial risks, operational risks, supply chain crises, external uncontrollable risks such as epidemics, floods, cybersecurity breaches, etc?

In the meantime, the concept of risk control should also be reflected in actively seeking potential growth opportunities during crises. For instance, during a market downturn, it is a good time for cash-rich companies to look for acquisition targets.

4. Redefine your business strategy and rapidly execute restructuring plans:

The purpose of a self-assessment is to identify pain points amid adversity, address them correctly, and timely adjust business strategies to overcome difficulties. As the Chinese saying goes, “a small boat is easier to turn around,” and SMEs must act quickly and decisively in executing restructuring plans.

A common tragedy I see is entrepreneurs and management lacking the speed and strength in execution. After identifying problems, the restructuring actions are too slow, exhausting the cash flow. Moreover, some businesses are already in critical condition, and seeking professional advisors for self-assessment comes too late.

Should entrepreneurs abandon the traditional notion that “financial management is an afterthought” or “financial management is merely a back-office tax compliance service”?

In summary, in the face of adversity, if New Zealand's small and medium-sized enterprises want to improve their competitiveness and continue to grow, they must actively reflect on themselves, formulate comprehensive financial plans, strengthen cash flow management, manage risks well, adjust strategies and strengthen execution. By using external professional services, SMEs shall continuously try to improve their management capabilities, and hone their financial management and risk assessment “inner skills” to strive to stand undefeated in adversity.

#VCFO

#Business Strategy

#Risk Management

#Cashflow