by Steve Mason* - Friday, 8th August 2008 -

A few weeks ago, as I’m sure you’re all aware, the media reported that US President George W Bush explained the credit crunch by saying that: “Wall Street got drunk and now it’s got a hangover.”

In light of these remarks, I thought it might be useful to think about how we finance directors can help to move away from the credit squeeze, and get rid of the so-called “hangover”. Here are some essential tips for businesses wanting to survive the credit crunch:

1. Don’t leave it too late
Tomorrow may be another day, but if you are starting to struggle then it may be too late. Keep your key business partners aware of your current situation as you may be able to work together to avoid problems. For example, banks in particular are facing a tough time and will be more cautious and concerned with bad debt than they have been in the past. Keeping them fully informed and aware of your challenges – and your plans to rectify – will keep them happy and give you that all-important breathing space.

2. Cash is King
Whatever your sector – private, public or charity – the oldest business adage of “Cash is King” remains. Without it, your organisation will go down. Anything you can do to improve your cash position must be your primary focus – a quick win is to renegotiate payment terms with your suppliers. If you can extend from, say, 30 days to 60 days, whilst keeping all other variables constant, then the effect on your monthly cash position will be positive.

3. Implement tighter cost control
There is a natural tendency within any organisation to look at costs from a top-down approach, but a bottom-up approach may be best. Successful businesses employ an approach called zero-based budgeting: it works on the premise that just because something was done in the current year, it shouldn’t necessarily be done in the next year. This encourages businesses to review all costs very carefully in terms of their value, and focuses on those that are actually needed to run the business. It is also great for questioning accepted norms and behaviours, and works best when all levels of a team or group are involved; often identifying immediate cash position gains – but this also requires very careful management of the people element.

4. Diversify your sources of credit
Just as we have a range of sources of credit from different providers in our personal lives, so too should businesses – the high street bank isn’t the be all and end all of business finance!

5. Always consider alternative forms of finance
The vast majority of equipment manufacturers offer financing schemes where the terms are structured to the projected life-cycle of the asset in question, be it a piece of plant, a photocopier, or even a vending machine! In this regard, you can avoid paying the full cost up-front and instead match it to income in regular payments over its useful working life. Specialist asset finance companies will also be able to offer more bespoke arrangements – such as payment holidays.

6. Sale and leaseback
One way to quickly release cash is to consider a sale and leaseback of existing assets. Once perceived as the “borrowing of last resort”, it is now acknowledged as a prudent way to radically improve an organisation’s balance sheet; exchanging fixed assets, often carried at a below-market value, for cash. You retain control of the asset, and can also negotiate lease payments to suit your business.

7. Align performance and rewards / staffing
More than ever it is vital to make sure that staff understand and are properly rewarded for achieving the strategic objectives of the practice. When times are hard, it’s vital you communicate, ensure full engagement and ensure that they are contributing fully and not being carried unnecessarily. Cutting staff numbers is never an easy thing to do, and it is important to do it as objectively as possible. Carefully consider the skills, commitment and capability you will need. Unnecessarily disregarding talent will prove to be a false economy in the long term.

I would be interested in hearing any additional suggestions or comments on how our businesses can beat the credit crunch – just add your comments below!

*Steve Mason is the finance director of Siemens Financial Services