No change in fundamental position as downturn bites

AS companies take a range of measures in response to the economic slowdown, the need for sound independent advice has never been more apparent.

When Paul Harrison took over Kelmscott-based tree lopper, Beaver Tree Services, in 1999, he had neither the expertise to build a company nor the experience to successfully deal with a recession.

Turning to Curtin University of Technology Growth Program manager, Phil Doyle, Mr Harrison learned three things that would equip him with the tools to manage his company through unprecedented tough times.

"Turnover is vanity, profit is sanity and cash is king," Mr Harrison said.

As credit gets tighter and confidence seeps out of the financial sector, companies are being urged to maximise their cash-flow positions this year.

Mr Doyle said with debtor days blowing out to about 60, the downturn had highlighted the need for local businesses to improve their financial management.

"Cash flow is king, and if that trend continues then we will see people get into trouble," he said.

"Two-thirds of the businesses that go broke are profitable; they just run out of cash because they lose control over it because their debtor days blow out.

"What I'm hearing from banks is that, more than ever, companies have to demonstrate they understand their markets now. People are finding it tough to get finance unless they've got sound foundations for their business and cash flows on from that."

Commonwealth Bank of Australia WA general manager of local business banking, Huss Mustafa, said banks were still lending to companies that displayed good business planning, knowledge of their industry, and knew their customers.

"Build a relationship with your business banker," Mr Mustafa told WA Business News.

"Just get back to basics, ensure you are managing your stock levels and are going back to the fundamentals of business, because credit is still out there."

Westpac's executive of regional banking WA, Jay Watson, said regardless of the economic downturn cash would always be top priority.

"It's not the profit level that counts anyway, it's the availability of cash and we're seeing many profitable businesses fail, particularly with contractors because their terms are being pushed out, because they don't have the cash," he said.

"The reality is all the major banks, but I can only speak for Westpac, from my understanding of competition, all the banks are still out there in the marketplace, no-one has retreated.

"The reality is though, with what's happening in the downturn, is you need to dot the i's and cross the t's. If a business or a new customer has good business fundamentals, then there would be finance available to them.

"Being a highly leveraged business during this time is not the space you want to be in, but still the same fundamentals apply. In assessing loan applications we'll look for the management of the business, the business itself, what industry is it in and what stage in the business cycle of the industry is it in, the serviceability equation is always high on the agenda, and then of course what securities are on offer."

Accounting firm PPB is advising clients to communicate with their creditors and to be aware of their cash-flow position.

"In addition, they need to ensure that, where they don't have the skills to handle issues they identify themselves, they obtain appropriate professional advice," PPB partner Simon Theobald said.

"Companies which suspect they are in financial difficulty should initially consult their accountant to assist them determine whether the issues they are confronting are short-term and can be overcome, or whether advice from a specialist recovery firm may be required."

Dôme Coffees co-founder Patria Jafferies agreed, saying in times of an economic crisis, business owners should re-evaluate their businesses first, and then seek independent advice about the appropriate action.

"Small businesses I think need the right support and information for business survival," Ms Jafferies said.

"For me it's always been about education and being pointed in the right direction on how to move forward.

"Small business is a lot more fluid than big business when times change because they can change the direction that is required much faster than the big corporates, which I think shows there is an advantage in being an SME."

Chamber of Commerce and Industry WA executive director of economic policy, John Nicolaou, said the slowing economy had prompted the chamber to revise its growth forecast for the WA economy down to 3.5 per cent in 2008-09 from 5.5 per cent.

He said economic growth was expected to slow further in 2009-10 to 3.25 per cent, from 6.25 per cent.

"The global financial crisis is largely a crisis of confidence," Mr Nicolaou told WA Business News.

"Business, industry and households are uncertain about their future prospects, and as a result have cut their spending on discretionary items."

Mr Nicolaou said CCIWA was advising members not to make rash decisions based on current conditions and to use the current period as an opportunity to critically review their business and begin cutting costs.

He said communication with customers and creditors was vital, as were protecting the balance sheet and company cash flow.

Derrick Vickers, who leads the corporate advisory and restructuring practice at PricewaterhouseCoopers in Perth, said business owners needed to act decisively and should focus relentlessly on key risks during times of economic uncertainty.

Mr Vickers, who is also on the national board of directors of the Insolvency Practitioners' Association of Australia, said businesses should ensure finances and working capital were in order.

"Businesses are certainly seeing a difference when it comes to financing or refinancing," Mr Vickers told WA Business News.

"Those businesses with well thought-out and provable business plans are doing better than those without."

Mr Vickers said while working capital management was a complex area to manage, there were always methods to make improvements.

"Terms of trade, overdraft versus debtor financing, accounts payable management, if an invoice is not received by a certain date then it will be processed in the next month's payment cycle, accounts receivable, actively calling debtors for payment prior to the due date, inventory ... lots of money is potentially invested here that can easily be released through proper stock controls," he said.

Mr Vickers said it was also important to continue marketing to existing and prospective customers during an economic downturn.

"There will always be the need to effectively market your business, the trick is making sure that it is pointed and effective," he said.

Research by the London Business School and international consulting group McKinseys showed that spending more on sales and marketing during a recession can lead to a bigger return on capital employed.

The research of 1,000 companies on the Profit Impact on Market Strategy database after the recession of the early 1990s shows that companies that cut their marketing budgets experienced a decline in a return on capital employed by 0.8 per cent after the recession.

Those that increased their marketing activity had an increase of 4.3 per cent.

McGraw-Hill research analysing 600 companies from 1980 to 1985 showed that companies that kept advertising during the 1980-82 recession experienced a 256 per cent increase in sales following the recession.