Last week I attended the West Australian State Breakfast hosted by the Chamber of Commerce and Industry WA. While I was listening to the treasurer, Dr Mike Nahan, explain the 2016 State Budget, I was struck by the similarities between running the finances for the State of WA and running your own business finances.
Like many small businesses:
- The State Government is presiding over a large but very cyclical financial enterprise with 25 per cent of its revenue tied to one income stream (iron ore).
- The State has a number of fixed expenses that it must maintain regardless of the amount of income coming in.
- The State invests speculative money with the aim of growing business.
Due to the cyclical nature of the state and the large number of competing demands on its expenditure, the State needs to run a very tight financial ship. The cornerstone of this management is the State budget, as it outlines where the government intends to focus their resources to the optimal benefit of the people of the State.
Like any business budget, the state budget is created in an environment of imperfect knowledge and uses information from experts as a basis of its financial forecast. And like all business budgets, it is only as good as the day it was done.
And like the State Government, the cornerstone to successful business management is quality financial record keeping and a 24-month rolling cash flow forecast/budget. This kind of budget outlines where your business intends to focus their resources to achieve growth and profit.
The budget last week held some good lessons for business owners on how to respond to a large change in your business environment.
Review your whole budget top to bottom.
Be very honest about the state of the business environment you are operating in, both internally and externally. Look at the actual up-to-date state of your finances and review every income and expenditure budget line item for the next two to three years.
Accept the change
In discussions of the State budget, the treasurer said:
“There is nothing to be gained by whingeing about what has happened. Leadership is learning how to play with the cards you are dealt and just getting on with it”.
The lesson here is to know where your business is at financially at all times. Don’t go into denial and hide from your numbers; just rip off the Band-Aid and look at the financial card you are dealt.
Manage fixed expenditure
On managing fixed expenditure the treasurer said:
“Our job is to maintain essential services, so even though our revenue has decreased there are many things that we cannot stop funding… What we have decided to do is to put restraints on expenditure where we can”.
The lesson here is that there are many fixed costs like rent, wages and large projects that you cannot cut, but you can put on restraints to manage the burden of fixed costs.
Reduce debt through asset sales
The State Government has decided to sell state assets to the private sector to reduce debt and regain its AAA credit rating. The government believes these assets can be run by the private sector in a way that won’t adversely affect their customers (taxpayers). The capital they raise from the sale will be used to provide services to the state and at the same time bring down the cost of their funding by improving their risk rating.
The lesson here for business owners is to know when your business needs to adapt to a new environment. Go back to your finances and look at which of your assets/products are performing and which are not. You may be able to sell or stop any underperforming parts of your business and as a result reduce debt and working capital requirements or improve margins.
Broaden the economy — invest in the future and work smarter
The Treasurer will use some of the liquidated capital to invest in the future of the State by creating an investment fund for innovation and new business areas.
The lesson from this is, even if you are facing temporary financial challenges in your business, you don’t want to kill the goose that laid the golden egg. So although you may need to put restraints on expenditure and rationalise your assets and products, you do not want to damage your business’ ability to generate revenue now or in the future when the business environment improves.
Use trying times as an opportunity to review the future direction of your business. Invest in some research and development, experiment with new product lines, or analyse and review the ideal target market for your products and services. Use this information to make the hard decisions about the future of your business and invest in that future.
Go with the flow
A big change to your business environment does not need to be a shock or a stressful event. The world changes all the time and will continue to do so throughout your business’ future. The aim is to be agile and realistic about the business environment you operate in. In the words of the State Premier:
“Western Australia is a very cyclical business environment, so we have to not over exaggerate to highs or the lows but just manage our way through them”.
Take the risk out of your business by having a financial management system that is recorded in detail and kept up to date every week. Create and maintain a 24-month rolling cash flow forecast for your business and review and adjust it every month based on the current and updated business conditions. This way you will always know where you stand as a business and manage your way through and prosper in any business environment.
Treat a slowdown as a time to put your head up, take a deep breath, look around and prepare for the next phase of your business adventure.