Remaining Robust in Times of Uncertainty (Summer 2009)

Global economic crisis, credit crunch, financial meltdown – all terms that have been echoing around the world in recent months. What has been happening around the world will inevitably affect New Zealand businesses generally and the wine industry specifically.

The state of the world economy is such that New Zealand cannot ignore what is happening – after all, given the relative size of our economy it is not able to influence the outcome of the current crisis.

From a New Zealand perspective, the question is whether businesses do nothing and hope for the best, or take appropriate measures to strengthen themselves for the storm to come and emerge on the other side in a relatively healthy state.

The majority of New Zealand wine businesses are small to medium sized enterprises (SMEs). Given the uncertainty for businesses at present, they need to make every attempt to safeguard themselves against the downturn in the economy. The mantra for businesses, to ensure survival in difficult times, must be “Cash is King!” Cash is the life blood of businesses.

What follows are some reminders for businesses of sensible and good business practice in uncertain times. They are by no means anything extraordinary that businesses must do; they are merely reinforcements of how to maintain a strong and healthy business.

Cash position

Businesses will need to take a more focused approach to what their cash requirements are. What are the business cycles for the business? If cash resources are inadequate, it will need to talk to the bank to make appropriate arrangements. The business will need to review its overdraft facilities for adequacy.

For a large number of businesses in New Zealand, their stakeholders’ lifestyles are funded by the business. In the current economic climate, businesses should be prudent about how many funds are extracted by stakeholders as drawings or otherwise.

Stock

Businesses must determine the levels of stock required for operating the business at an optimal or efficient level. Too little stock means the business could be caught short; however, too much stock means cash is tied up unnecessarily. To get stock at an optimal level, management should review turnover levels of the business, which will in turn provide information about when stock should be re-ordered.

As part of the stock review process, any obsolete or slow moving stock should be cleared as soon as possible – they could become sale or discounted items. To move stock quickly, the business should also review its sales and distribution strategies.

Debtors

The first thing to remember about debtors is that they represent money belonging to the business – money that is sitting in someone else’s bank account. This is the time to ensure that the business has robust credit control policies. To encourage prompt or early payment, discounts could be given. Debtors, who may have been lax in the past with payment, may need reminders to prompt them for payment.

Cost management

Businesses must also review their cost structure and, where possible, savings should be made. Wherever feasible, businesses should concentrate on their core functions and costs. Where there is “dead wood” within the business, consideration should be given to pruning that part of the business.

Businesses should identify which parts are operating efficiently, and which parts are not. Can efficiencies be improved upon? Where there are inefficiencies, management should isolate the reasons for the inefficiencies, and work on improving those parts of the business.

These are a few areas that businesses can focus on. There are many more areas and strategies that businesses can look at to ensure a robust future in difficult economic times. Businesses that have a strategy now are more likely to come out at the other end of economic unrest unscathed.

Published in WINE Hawke’s Bay Summer 2009.

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