Those Simple Bear Necessities: Setting Aside Reserves for Downturns?
Dun & Bradstreet’s latest outlook survey for June showed that 43 per cent of businesses reported no change in their debt levels while 36 per cent planned to reduce their debt within the next three months.
Business coach and entrepreneur Jen Dalitz – founder of www.sphinxx.com.au, a social networking group for businesswomen and executives – believes many SME owners fail to maintain adequate cash reserves, and risk a lack of solvency if demand for their goods or services change.
In her own business, Ms Dalitz keeps one year’s worth of salaries aside in case of a cash-flow crisis.
“It’s quite common to see people holding more debt than assets,” Ms Dalitz observed.
“When I go to small business events, many people will say the common problem is getting finance from banks, but is it a sustainable strategy?”
Thanks Jen.. When can we sign you up for business coaching? Setting aside reserves for hard times is something hibernating mammals have been managing to do for millions of years – not exactly Harvard MBA stuff! Maybe you could go on the lecture circuit with a Kodiak bear!
What about businesses with ‘lumpy’ revenue streams and high fixed and variable expenses like the construction industry?
Business coaches sell intellectual property. Construction companies build properties. This means buying materials, paying wages, insurance, workers comp etc. Moreover Jen, you can only be in one place at one time. Many businesses concurrently run multiple projects. The timing may not always be opportune, but if they turn one down they may not have any reserves in 12 months time. And, what happens when they have the opportunity to start a new and profitable project but have no reserves or assets – should they turn their backs?
The construction landscape will always be somewhat chaotic. Using assets to fuel growth is de rigeuer, if one has the assets. Progress payment funding through accounts receivables is another. Many pundits ‘boo hoo’ it because their conception of it hasn’t changed since they studied it for one hour at uni.
Daniel Dunsford director AR Cash Flow says ‘progress payment funding can be turned-on for just a portion of a company’s receivables for a limited time period. It’s not a life sentence and should be used expeditiously.’
‘We have a client in construction, who uses their accounts receivables to leverage higher discounts on raw materials. They does this intermittently and for nothing else.’
Quite simply, business sectors are different. Storing nuts for winter (setting salaries aside) is conservative, sensible advice, but certainly not all encompassing. There’s no replacement for getting on the net or the phone and checking your options with your financial adviser and crunching some numbers.