A lot can be learnt from Western Australian businesses in terms of maintaining business in tough times and positioning the business for new growth according to RSM business advisory director Craig Ridley.
“The economy moves in cycles that aren’t always as extreme and obvious as boom and bust. Business owners need to keep an eye on what’s happening right now and plan for the future because nothing ever stays the same,” Mr Ridley said.
“For example, demand for products and services dropped dramatically in Western Australia during the mining downturn, with nothing to replace it. The same could happen if there’s a drop-off in construction activity in other states. Without demand, cash flow can dry up quickly, which makes it difficult to service loans on equipment, for example, that no longer earns revenue. At the same time, asset values can fall steeply.”
Mr Ridley said accountants should be working with their clients to prepare for a possible downturn.
Preparation can include stress-test cash flows and profit models for ‘what if’ scenarios, chasing debts diligently to avoid outstanding debts, building cash or equity reserves to ensure the business’s long-term financial stability, and managing workforce capacity flexibly to control costs while maintaining operational capacity.
In summary, failing to plan is planning to fail according to Mr Ridley.
“These types of events can put immense pressure on businesses, so it’s important to be ready for them and have a plan in place,” he said.
“Business success depends on careful planning. By putting safety measures in place ahead of any downturn, a business can improve its survival odds. Failing to plan increases the likelihood of the business either failing or being acquired by a larger competitor during a downturn.”