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Rightsizing your business ahead of uncertain times
The following article is an extended version of an article by corporate finance partner Aiden Murphy which appeared in the Irish Independent on Monday 23 September, 2019.
As businesses face ongoing market challenges combined with the impact of Brexit and a weakening of sterling, now is a good time to take a strategic overview.
Top seven areas for a business to review
The key decisions to be made will become obvious if you complete a business diagnostic using seven identifiable tasks which every business owner can easily undertake.
1. Cash flow analysis
As a starting exercise each business owner should review their weekly business cash flow for the last year. This will form the template to forecast for the next 12 months. By analysing their top customers, segments etc., business owners will identify possible growth opportunities and where a potential slowdown might occur which can then be factored into the projections.
By categorising costs, on a product, payroll, variable and fixed overhead basis, businesses will quickly see periods of inefficiency and be able to identify times where resources need to be put to greater use or trimmed.
This will help pinpoint the key risk factors for the business that impact cash flow, i.e. loss of a particular customer, supply delays due to Brexit, dependency on certain staff for key customers and do “what if scenarios” on the cash flow.
: Use the cash flow analysis to look at the next eight weeks of sales and set targets with your sales teams to beat the same period last year. Report back on a week-by-week basis with the team to set a cultural requirement for the need to drive the organic growth.
2. Overhead analysis
Most businesses with a determined focus can trim overheads by over 5%, just by considering alternative suppliers for items used by the business.
: What is often forgotten is the simple task of asking staff for ideas as to where savings can be made in the business and rewarding the best ideas.
3. Product margin analysis and stock holding days
The 80:20 rule that applies to many businesses is where the top 20% selling items or customers generate 80% of the profit. Business owners should establish these ranking by profitability and prioritise adding larger, growing product lines or customers.
The working capital cost across customers should be examined, as customers taking extended credit can bite into the margin.
This working capital cost could be exacerbated by Brexit as businesses may need to stockpile goods for customers. This will impact cash flow as the normal cash conversion cycle from payment for supplies to payment from customers is elongated.
Put your customers on notice that supply times may become strained in the event of transport delays through the ports as a result of Brexit and encourage them to buy a buffer stock so you can invoice and maintain continuity of cash flow.
4. Currency impact / hedging
The closeness of trade with the UK means many businesses will be buying or selling in sterling. The potential for sudden 5% – 10% swings in the exchange rate following political progress or impasse requires businesses to de-risk by hedging their needs.
Many products that are imported from the UK are manufactured elsewhere but the traditional supplier has had a UK base which can be bypassed by setting up different supply channels or sourcing alternative products.
5. Establishing UK presence as a hedge
Businesses can protect themselves against a hard border by establishing a UK footprint. Currently this is a straight-forward incorporation processes, but this may change after Brexit.
For many businesses establishing a footprint in Northern Ireland may be a more practical approach than across the water and can be achieved now at a relatively low cost.
6. Staff efficiency / redundancy
Brexit is expected to cause a general economic downturn and so firms need to tighten up their cost base. Now is the time to see if positions can be amalgamated, processes streamlined, and hours reduced to establish if a redundancy program should be implemented.
There is financial assistance available from the Department of Social Protection for companies who cannot afford to pay the statutory redundancy cost.
7. Joint ventures / mergers
Once a year it is always useful for a business owner to consider what works best in terms of enhancing “business value”. Should one continue with organic growth or look at alternative strategies? This could be either seeking out or being a target for acquisition, or considering some form of strategic alignment, or bringing management to ownership.
: There are tax efficiencies in terms of low net effective capital gains tax treatment for business exits using retirement relief and entrepreneurial relief. Looking ahead, a tax plan around exit should be put in place in good time.
Whatever direction Brexit takes, having a lean and agile operation will keep businesses on the best track for success.
Aiden Murphy is a partner with Crowe practicing in the areas of corporate finance, rescue and restructuring. If you would like assistance with any of the above measures contact Aiden or a member of our corporate finance team.
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