Sunday, September 26, 2010

Your Business Fitness check

Knowledge of the financial "fitness" of your business is necessary for you to decide what you can and should do. Alot of financial health and performance of your business can be obtained by analysing your financial statements through financial ratios, terms like ROI, ROE, EBDITA,etc.. Comparing these ratios against past performance and similar businesses could give you some relevant indications of the strengths and weaknesses of your business.

SWOT analysis ( very common in Business studies and one of the framework for business analysis )
You should undertake a SWOT - strengths, weaknesses, opportunities and threats - analysis to determine the state of your business, its capacity to recover now the downturn is over, and what additional capacity may be needed.

When analysing opportunities and threats, you should:
· Research changes in customer taste
· Research how the tough times have affected your suppliers and competitors.
· Determine what changes may need to be made, including adding capacity to your business, shifting capacity or disposing of excess capacity.

Review your business plan and rewrite where appropriate
You should review your current business plan to ensure it reflects the capacity of your business and the the ability to grow that capacity. You should consider where you want to take your business and understand any uncertainties that remain. Important areas to focus the plan on include:

· How to expand capacity
· How much such expansion is likely to cost
· How the business is going to pay for such expansion.

Focus on innovation and efficiency :
When a business is in recovery mode, it is likely to become more innovative while keeping a strong focus on efficiency. Areas innovation should be limited, while staff should be empowered to search for new opportunities. To ensure limited resources are focused on the most promising innovations, pre-action reviews of projects should be undertaken.

Take advantage of opportunities :
Businesses that now find themselves in a strong financial position should consider opportunities to expand. Opportunities may be favourable, as some asset prices remain depressed.

Review and revise your marketing plan :
You should consider reviewing and revising your marketing plan. Such a plan should reflect the likelihood of limited resources continuing to be a constraint on marketing activity. It is, therefore, important that your marketing plan be focused on helping improve the cash position of your business, its profitability and promoting any new - or revived - products and services.

A marketing plan for a business seeking to recover should:
· Focus on sales that have high margins and bring in cash quickly
· Reward staff for sales of higher-margin products and when payment is received
· Avoid discounting, unless it can achieve a better gross profit margin through increased sales
· Measure the success of each promotional activity or campaign
· Encourage customers to pay at the point of purchase or pay early.

Remain focused on improving cash position
Focus on improving your cash position by improving working capital management - such as by reducing stock levels, increasing the percentage of cash sales and reducing the time you give debtors to pay. Such moves add to your cash reserves, which can be an important source finance.

Focus on improving profitability

Amid the recovery, discounts and other incentives introduced to improve your cash position during the tough times should be removed, so you can focus on improving profitability. Increased profitability builds retained earnings, creating another internal source of finance.

Funding recovery efforts

When considering borrowing from a bank, a business should:
· Determine what the funds are to be used for and the time they are required
· Be realistic about the amount of funds that can be afforded
· Determine the level of security that can be offered
· Start early.

Addressing weaknesses in your business
The actions a business may have taken to get through the slowdown can have negative consequences that may need to be addressed amid the recovery. Activities that may need to be undertaken to address the consequences of actions taken during tough times include:

· Increase stock
· Pay down high-priced external debt
· Broaden the focus of sales
· Revisit staffing arrangements
· Beware of a false recovery.

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