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What impact does a recession have on financial management?
As some would say 'a crisis is a terrible thing to waste'. A recession makes organisations concentrate on the financial issues which they should be focused on continually - finance staff becomes the business’ best friends
During a recession businesses are forced to focus on the four ‘C’s which are;
- Cash
- Costs
- Commitment
- Communication
Cash
Many a profitable business has gone under because of lack of cash.
During a recession businesses must minimise their ‘Cash Conversion Cycle’ that is the difference between their DSO (Days Sales Outstanding) and their DPO (Days Purchases Outstanding). This effectively means closely targeting and monitoring cash collections whilst at the same time maximising credit terms with suppliers.
Sound Credit Management policies are essential in this regard with rigorous credit checking at the start of the process, timely issuing of invoices to customers and swift follow up to ensure that payments are made to terms.
During a recession larger suppliers will be subject to the same economic challenges but in some cases terms can be negotiated - Government agencies will also look favourably on businesses that commit to and stick to agreed payment plans.
Costs
All costs should be up for challenge under normal business conditions however in a recession this process should be even more rigorous.
All cost lines in the P&L must be thoroughly examined and challenged, the obvious ones being property costs, people costs, ensuring that the back office is performing efficiently and that the front office is productive.
Capital expenditure plans also need to be justified as they also have a direct impact on cash flow depending on how they are funded.
Commitment
Commitment from the business to deliver performance on budget and where cracks appear there must be a commitment to make timely and effective ‘Turnaround/Close’ decisions. Loss makers who burn cash need to be of significant strategic importance if they are to be sustained during a recessionary period.
Financial and Management Information flow is critical and needs to be accurate, timely, relevant and complete - however the business needs to be committed to act upon it.
Communication
Although listed fourth, communication is probably the most important of all four C’s.
This includes internal communication with staff, shareholders and strategic partners and external communication with customers, suppliers and government agencies. Communication with these various stakeholders allows everyone to be informed about what is going on and the current position of the organisation.
Communication is the tool that underlies the other three C’s and without it efforts in those other areas will not be as effective as they could be.
Remember that 'turnover is vanity and cash is sanity' - profit is not realised until the cash is in the bank.
With a focus on cash and costs, a commitment to make tough decisions and take timely action, all supported by an open and honest communications strategy will go a long way to seeing any business through a recession.
Author: Mark Glenfield, Chief Financial Officer for GEG