NAB’s 10 top tips for business success in a volatile market

 

This article appeared in Issue 3#3 (March/April 2009) of Business Franchise Australia & New Zealand

Barry Thatcher, National Manager NAB Franchise Banking says no business is too small or established to be impacted by the global financial crisis, and franchises are no exception. He offers ten top business tips to help franchisees survive the current market.

Over the past six months we have seen a deterioration of the world economy and that of Australia. We have seen rising costs, restricted access to funding, lower business and consumer confidence and a collapse of world stock markets. 

The franchising sector, like most industries within Australia, has been impacted by the global financial crisis of 2008. Even before the onset of the crisis, franchisors have been trending towards a negative perception of the economy¹. This is not to say there still isn’t enormous potential in this particular sector. Some argue that in the downturn franchising offers (is counter cyclical) more opportunities than many other business models. And Franchising in Australia continues to grow at a steady rate².

In order to succeed in 2009, franchisees old and new need to get back to basic business fundamentals and principles to survive what looks like continuing times of volatility. Also don’t wait until it’s too late.  Seek out early advice from business experts in their fields such as bankers, accountants and lawyers. 

The second half of 2008 was especially hard for franchisees and franchisors alike with consumer spending, consumer confidence and business confidence experiencing a rapid decline. On a positive note however, unemployment has seen a surge in the availability of new franchisee talent which in past years has traditionally been a common restriction on the sector.

The next 12 months are looking optimistic for businesses who want to grow. Here at NAB we have the capability to lend for growth – just because the global economy may have slowed down, does not mean your business has to.

When planning ahead for 2009, franchisees should think about any potential risks they might encounter. With interest rates and fuel costs fortunately on the gradual decline, businesses now need to look at seasonal fluctuations that may affect their cash flow and prepare in advance. Economic uncertainty has shifted focus to cash flow, budgeting and staffing. 

Businesses in the retail and automotive sectors have had it tough recently, while the healthcare industry has been relatively strong. Franchisees should expect that overall business conditions may improve from about the third quarter of 2009, however, in order to make the most of the year ahead it is essential to plan for every possibility.

Here are ten tips for new and existing franchisees to consider when planning for 2009:

Cash flow management

1. Review your cash flow forecast with a best and worst case scenario and work out whether you have reserve funds, or need to borrow. If you have extra cash, think about when you might need it, and whether it can be invested in a high interest account until then. If you need extra cash, ensure you discuss the timing of when it’s needed and can be repaid. Also consider the different types of finance available, including loans, overdrafts and leasing.

With interest rates and fuel costs fortunately on the gradual decline, businesses now need to look at seasonal fluctuations that may affect their cash flow and prepare in advance.

Relationships with suppliers

2. Strengthen your relationships with your accountant, lawyer and banker. Talk to your accountant about the tax implications for the current year and beyond. Don’t wait until June or you may limit your options. You should be keeping an open dialogue with your business banker in these turbulent times. Communication is the key and strong relationships are vital in the current environment. Ensure your business banker is aware of any potential expansion plans, so you can act quickly when opportunities arise.

Diversifying your assets

3. Consider diversifying assets outside your business to continue to provide income, even when your business takings are below average. At least once a year, review the weighting of shares and other assets and correct if necessary. However, when diversifying, do so with good advice and extreme caution. Every business owner looks for ways to maximise value or create new revenue streams in other areas eg property investment and shares. Whilst this can be a good strategy, it’s also one of the most common causes of business failure / stress. If you are considering doing this you need to ask yourself:

  • Do I have any experience in the new business venture?
  • What’s the maximum investment into the business that I can afford before it will negatively impact on my core business?
  • If the new business requires more capital where will it come from, and if it fails, am I prepared to walk away and can my core business survive with the additional debt load or loss capital?

And at the end of the day, don’t forget to protect your assets, including yourself, by taking out adequate insurance cover.

Business Planning

4. Start planning now for how to handle the next economic downturn – learn from your past experiences and talk to a business expert about any foreseeable risks and challenges your business may face in the short and long term. Australian businesses are taking a big risk if they enter 2009 without an up-to-date business plan. While in recent times a booming economy has meant many businesses have enjoyed success without a great deal of planning, as business conditions plummet and belts tighten, small businesses need to plan for unsteady times ahead. A strategy that incorporates financial planning and succession planning will help your business grow. Unexpected costs, business conditions and any pending crisis will have been planned for, making your business much more resilient and prepared for the challenges ahead. A business plan is your blue print for success, so make it a priority.

Managing debt

5. Avoid over-gearing and be sure to maintain manageable debt levels. Businesses need to establish budgets based on 15-20% of the business/sales dropping away and still being in a position to service their debts. In a downturn, businesses need to have access to working capital resources to see them through tough times for a reasonably prolonged period.  

Know your business

6. Remain connected with your business. Too many business owners fall into the trap of thinking they can be passive investors/managers. Being involved in your business keeps you connected with customers, sales, costs and competitors, and keeps your staff focused. After all, if you don’t appear that interested in your business, why should you expect your employees to feel any different?

More on cash flow

7. Be sure to understand the difference between cash in the bank, and true cash flow needs. Business owners with large inventory holdings often make the mistake of seeing cash in the bank as healthy cash flow, when in reality cash in the bank is only a ‘point in time’ measurement of gross cash before paying creditors, overheads and fixed costs. A simple P & L and cash flow chart will tell you your business’ true position at month end after all these items have been taken into account. Without this, you’re flying blind and can often be given a false sense of security that things are going well.

Don’t be tempted to overtrade

8. Be careful of over-trading. When things get tight, increasing sales are often used as a way to regain sales momentum and clear stock. This can of course be a good strategy, however mismanaged sales can fall into the category of over-trading, which is simply where you want to maintain sales momentum by discounted and/or uncontrolled margins to the point where you are not covering the costs to run the business and are actually losing money. In the short term, this can result in unwanted losses, and in several cases it will result in insolvent trading or total business failure.

Preventing theft

9. Reassess your theft and internal controls. Now is probably a good time to review your internal controls, as theft can be a major cause of small business failure, particularly where assets are liquid or where staff are responsible for cash sales. It’s not the most comfortable discussion to have with your staff, but prevention and implementation of basic, straight forward controls which suit your business will save you money and avoid difficult discussions and situations with staff in the long run.

Compliance

10. Maintain compliance with your franchise system. A franchise agreement is a legal agreement offering you a licence to use brand, procedures, products and services of a franchise system for a defined period of time and subject to you being compliant. 

If you haven’t already, make 2009 your year to have a good relationship with your franchisor. 

Familiarise yourself with your initial agreement and assess the parameters in which your business is operating and make sure you’re compliant. Simple business changes such as implementing a sales campaign or making a change to a system can be a compliance breach. Open and transparent communication between the franchisee and franchisor is paramount to business success.

NAB LogoImportant note: Any advice contained in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on any advice in this article, National Australia Bank Ltd recommends that you consider whether it is appropriate for your circumstances.

¹ Franchising Australia survey 2008
² Franchising Australia survey 2008