Managing a financial crisis
It is widely recognised that in high stress situations people find it difficult to make to make good decisions as their IQ is reduced by this distress.
When a business is under pressure financially for whatever reason, emotional stress is experienced. It is then important to effectively manage this stress in order to have the emotional energy to address the problems at hand and solve them to bring the business back in line.
To minimise these stresses it is also important to act early while there is still a level of control rather than being controlled by the situation.
Seek assistance from others in solving the problems, consult with service providers, professionals, Farm Financial Counsellors and the like and by sharing the stress it will lighten the load and make the problems easier to solve. Remember the saying "Many hands make light work" and this really applies in this situation.
I believe that there is a good recipe that can be used with ten (10) identifiable steps for managing a financial crisis.
1. Know your financial position
Prepare a Statement of Position, which lists all your assets and liabilities and where these are. As part of doing this look at the real current values of both assets and liabilities and the timing of when debts were incurred as well as the repayment arrangements. This will help to identify what level of equity you have, whether you have some assets which are unproductive or surplus to your requirements, which assets are encumbered and therefore your future borrowing capacity.
Prepare cash flows, Both historical and projections should be done to help with the analysis of what has happened to put you in this position and if/how you are able to trade out. At this stage it is also a good idea to do some "what if" scenarios for the projections to enable you to identify and analyse some of the future risks that might be encountered.
Compile the past Financial Statements/Profit and loss/Tax returns, By compiling these figures you or your consultant/Financial Counsellor can then analyse them to plot trends in what has brought you to the current crisis. It also helps with preparation of the cash flow projections and in identifying where income could be increased or expenditure could be shaved.
2. Prepare a strategic audit
Doing a SWOT analysis can identify the Strengths, Weaknesses, Opportunities and Threats to which the business is subject. Once you have identified what these are, you can start to use your identified strengths and opportunities to progress your enterprise. By also recognising your weaknesses and threats you can work around them or attempt minimise their effect on the business.
3. Revise your long and short term goals
You will never get "There" if you don't know where "There" is. Goals clarify what you are doing it all for and why you are going without now in hope for the gold are the end of the rainbow. It is extremely difficult for most people to identify and set their goals but is extremely rewarding when they are made and planned for and they then are achieved. Write the goals down as this has the effect of giving them credibility and substance. Identifying them also helps in the future planning of the business direction.
4. Decide if the deficit is a continuing problem
Some examples of short-term problems may be a short drought, short-term price collapse/fluctuations, disease outbreak or short-term grain price increases. If you identify that the problem is short term, a solution might be to seek carry-on finance from your lenders. It may also be possible to forward sell some of your product, sell a piece of surplus machinery or redeem an off farm investment with the view to reimbursement at a later date.
If you identify that the problem is a longer term one such as a prolonged price collapse, high price structure for the farm or a long term drought, then you may not be able to get further carry-on finance or it may not be an appropriate solution to the problem. If this is the case then you may need to look at other measures of addressing the problem.
5. Look at increasing income
Review your whole farm business and see if there are ways of increasing the income which have not been looked at in the past because there has not been a need. There may be an opportunity to improve the technology used in the enterprise, which will give gains in income. Such examples as weighing stock rather than relying upon purely visual assessment, or mechanised feeding systems which deliver more precise rations than being done by hand to maximise the weight gains through having fresh food on demand.
Increases in income may be achieved through better timing when your product is available. This could be done by timing the maximum number of stock to be ready at the time when higher prices are paid on a cyclical basis throughout the year, for example in the lead up to Christmas each year.
Most farm enterprises are multi-enterprised. This means that there is several separate small businesses within the farm business. By doing a gross margin analysis on each of these businesses you may be able to identify which business is the most profitable. From this you could then concentrate on the most profitable parts of the business and leave the least profitable alone to maximise the income.
An alternative may be to seek off farm income for one partner. This may be an opportunity to inject cash flow into the business and maximise the effectiveness of each partner involved in the case where all are not fully occupied.
6. Look at ways to reduce costs
A short-term solution may be to defer some expenditure or costs, which are not essential until the income improves. It may involve making arrangements with a creditor with whom you have a good relationship to "put it on the slate" in the short term.
One hidden cost blow-out is often personal expenditure, as it does not generally appear on the taxation profit and loss statement. It may be time to review the living expenses as a way of increasing the businesses bottom line.
Capital expenditure tends to be in large slices and will put the cash flow under pressure in times of difficulty. It may be appropriate to review if the capital expenditure is really crucial or whether it can be deferred till a later date when the cash flow is more positive.
Overhead costs are those which tick away no matter how productive the enterprise is at the time. Review what is being spent on items such as labour (can you do without that extra worker?), machinery, insurance, phone, repairs and maintenance and principal and interest debt servicing costs. There may be ways of reducing these costs through timing or revision of the operation.
"Beware of false economies" in reviewing the reduction of costs as there is real trap in minimising costs to the detriment of production. Cost and return is a delicate balance when it comes to the bottom line of the business.
7. Look at restructuring loans
As identified in the previous step there may be a more appropriate structure for your debt that may suit the current situation. It may have been totally appropriate when the loan was entered into but due to the changing environment it may now be the enterprise's Achilles heel.
Look at going interest-only in the short term if you believe the problem is only short term. The debt will not be reducing but at least the debt servicing will be brought back to a bare minimum.
Better timing of repayments is also an option. By timing repayments to the period when income is anticipated to be at its greatest, then there will then be lesser reliance upon the overdraft or cash reserves. Rather than half yearly repayments of two large amounts it may be more appropriate to time the repayments monthly if cash flows are regularly monthly.
Term loans quite often repaid over a short term if the cash flow enables this when the loan is implemented. It may be appropriate to term this over a longer term if cash flow difficulties are experienced, to free up funds in the short term. A down side of doing this however is that more interest is paid over the longer term but this negative may be offset by the affordability factor. A common fault of businesses is to purchase long-term assets with short-term finance and visa versa. In other words, an asset that will have a long-term value might be purchased out of the overdraft or cash flow rather than on a long-term loan facility. This tightens up cash flow. In good times this may not cause a problem but when the pressure is on it can be overwhelming. The alternative is also a cause of problems where a quickly depreciating asset, which has to be replaced often, is funded on a long-term loan. You may still be paying for the first item when you need to raise further funds for its replacement. Again cash flow suffers.
8. Consider financial reserves at your disposal
Farm Management Deposits were designed to smooth out the highs and lows of cash flow between years rather than have tax eat up any profits that may be accumulated. If the financial problem warrants, now might be a good time to redeem these deposits.
Investment in off farm assets is also a good risk mitigation strategy in the good times. When the farm is under stress financially it may be appropriate to sell the off farm real estate to protect the core asset. At this stage it may be appropriate to identify which is the core asset and which could be done without to protect that which was identified as a core asset. Things to weigh up in this instance are return on investment against potential for return as well as other non-monetary concerns.
Investments previously made in shares and managed funds may also be an avenue to bring cash back into the core business. Off farm investment is a good risk mitigation strategy with generally liquid reserves, which can be brought back into the business when needed.
Superannuation or Life policies are a source of emergency funds in time of financial crisis. Life policies can be cashed in if able to help fund deficits and superannuation funds will allow some withdrawals in times of financial hardship. Each fund has its own rules in these situations and these should be readily available upon request.
9. At this stage it may be appropriate to review how things are going and make decisions about the future
If steps 1-8 have worked, the crisis may be over and things are back on an even keel. It is now time to implement risk minimisation strategies to stop another similar crisis happening in the future
If 1-8 did not work, there is now a need for some important decisions to be made about the future.
It is now time to consider selling part or the entire farm!
Be prepared to act - failing to act is common - in a depressed state people try to escape from their problems by doing nothing but it doesn't work, it only makes the problem worse.
10. Now that the pressure has eased it is time to maintain tight financial control and to communicate with your financiers
You have revised you plans and are working towards a new future therefore it is time to manage this more realistic plan to ensure that the problem you have just come through does not resurface.
It is now also a good time to work on your relationship with your lenders to rebuild the bridges and gain their confidence back that was previously there but which may have suffered during the crisis. This will stand you in good stead in the future for the next time difficulties are experienced. Murphy's Law still prevails and therefore it is not a matter of if it will occur but when.
The Department of Primary Industries and Fisheries Farm Financial Counselling Service offers help in:
clarifying a problem or concern and working towards a solution.
understanding your financial position
identifying and assessing options for resolving financial and other problems
evaluating enterprises and assessing farm viability
finding information on rural finance
evaluating re-financing options
preparing loan applications
negotiating with your bank
preparing cash flows
finding information on Government schemes of assistance
accessing other service providers.
When a business is under pressure financially for whatever reason, emotional stress is experienced. It is then important to effectively manage this stress in order to have the emotional energy to address the problems at hand and solve them to bring the business back in line.
To minimise these stresses it is also important to act early while there is still a level of control rather than being controlled by the situation.
Seek assistance from others in solving the problems, consult with service providers, professionals, Farm Financial Counsellors and the like and by sharing the stress it will lighten the load and make the problems easier to solve. Remember the saying "Many hands make light work" and this really applies in this situation.
I believe that there is a good recipe that can be used with ten (10) identifiable steps for managing a financial crisis.
1. Know your financial position
Prepare a Statement of Position, which lists all your assets and liabilities and where these are. As part of doing this look at the real current values of both assets and liabilities and the timing of when debts were incurred as well as the repayment arrangements. This will help to identify what level of equity you have, whether you have some assets which are unproductive or surplus to your requirements, which assets are encumbered and therefore your future borrowing capacity.
Prepare cash flows, Both historical and projections should be done to help with the analysis of what has happened to put you in this position and if/how you are able to trade out. At this stage it is also a good idea to do some "what if" scenarios for the projections to enable you to identify and analyse some of the future risks that might be encountered.
Compile the past Financial Statements/Profit and loss/Tax returns, By compiling these figures you or your consultant/Financial Counsellor can then analyse them to plot trends in what has brought you to the current crisis. It also helps with preparation of the cash flow projections and in identifying where income could be increased or expenditure could be shaved.
2. Prepare a strategic audit
Doing a SWOT analysis can identify the Strengths, Weaknesses, Opportunities and Threats to which the business is subject. Once you have identified what these are, you can start to use your identified strengths and opportunities to progress your enterprise. By also recognising your weaknesses and threats you can work around them or attempt minimise their effect on the business.
3. Revise your long and short term goals
You will never get "There" if you don't know where "There" is. Goals clarify what you are doing it all for and why you are going without now in hope for the gold are the end of the rainbow. It is extremely difficult for most people to identify and set their goals but is extremely rewarding when they are made and planned for and they then are achieved. Write the goals down as this has the effect of giving them credibility and substance. Identifying them also helps in the future planning of the business direction.
4. Decide if the deficit is a continuing problem
Some examples of short-term problems may be a short drought, short-term price collapse/fluctuations, disease outbreak or short-term grain price increases. If you identify that the problem is short term, a solution might be to seek carry-on finance from your lenders. It may also be possible to forward sell some of your product, sell a piece of surplus machinery or redeem an off farm investment with the view to reimbursement at a later date.
If you identify that the problem is a longer term one such as a prolonged price collapse, high price structure for the farm or a long term drought, then you may not be able to get further carry-on finance or it may not be an appropriate solution to the problem. If this is the case then you may need to look at other measures of addressing the problem.
5. Look at increasing income
Review your whole farm business and see if there are ways of increasing the income which have not been looked at in the past because there has not been a need. There may be an opportunity to improve the technology used in the enterprise, which will give gains in income. Such examples as weighing stock rather than relying upon purely visual assessment, or mechanised feeding systems which deliver more precise rations than being done by hand to maximise the weight gains through having fresh food on demand.
Increases in income may be achieved through better timing when your product is available. This could be done by timing the maximum number of stock to be ready at the time when higher prices are paid on a cyclical basis throughout the year, for example in the lead up to Christmas each year.
Most farm enterprises are multi-enterprised. This means that there is several separate small businesses within the farm business. By doing a gross margin analysis on each of these businesses you may be able to identify which business is the most profitable. From this you could then concentrate on the most profitable parts of the business and leave the least profitable alone to maximise the income.
An alternative may be to seek off farm income for one partner. This may be an opportunity to inject cash flow into the business and maximise the effectiveness of each partner involved in the case where all are not fully occupied.
6. Look at ways to reduce costs
A short-term solution may be to defer some expenditure or costs, which are not essential until the income improves. It may involve making arrangements with a creditor with whom you have a good relationship to "put it on the slate" in the short term.
One hidden cost blow-out is often personal expenditure, as it does not generally appear on the taxation profit and loss statement. It may be time to review the living expenses as a way of increasing the businesses bottom line.
Capital expenditure tends to be in large slices and will put the cash flow under pressure in times of difficulty. It may be appropriate to review if the capital expenditure is really crucial or whether it can be deferred till a later date when the cash flow is more positive.
Overhead costs are those which tick away no matter how productive the enterprise is at the time. Review what is being spent on items such as labour (can you do without that extra worker?), machinery, insurance, phone, repairs and maintenance and principal and interest debt servicing costs. There may be ways of reducing these costs through timing or revision of the operation.
"Beware of false economies" in reviewing the reduction of costs as there is real trap in minimising costs to the detriment of production. Cost and return is a delicate balance when it comes to the bottom line of the business.
7. Look at restructuring loans
As identified in the previous step there may be a more appropriate structure for your debt that may suit the current situation. It may have been totally appropriate when the loan was entered into but due to the changing environment it may now be the enterprise's Achilles heel.
Look at going interest-only in the short term if you believe the problem is only short term. The debt will not be reducing but at least the debt servicing will be brought back to a bare minimum.
Better timing of repayments is also an option. By timing repayments to the period when income is anticipated to be at its greatest, then there will then be lesser reliance upon the overdraft or cash reserves. Rather than half yearly repayments of two large amounts it may be more appropriate to time the repayments monthly if cash flows are regularly monthly.
Term loans quite often repaid over a short term if the cash flow enables this when the loan is implemented. It may be appropriate to term this over a longer term if cash flow difficulties are experienced, to free up funds in the short term. A down side of doing this however is that more interest is paid over the longer term but this negative may be offset by the affordability factor. A common fault of businesses is to purchase long-term assets with short-term finance and visa versa. In other words, an asset that will have a long-term value might be purchased out of the overdraft or cash flow rather than on a long-term loan facility. This tightens up cash flow. In good times this may not cause a problem but when the pressure is on it can be overwhelming. The alternative is also a cause of problems where a quickly depreciating asset, which has to be replaced often, is funded on a long-term loan. You may still be paying for the first item when you need to raise further funds for its replacement. Again cash flow suffers.
8. Consider financial reserves at your disposal
Farm Management Deposits were designed to smooth out the highs and lows of cash flow between years rather than have tax eat up any profits that may be accumulated. If the financial problem warrants, now might be a good time to redeem these deposits.
Investment in off farm assets is also a good risk mitigation strategy in the good times. When the farm is under stress financially it may be appropriate to sell the off farm real estate to protect the core asset. At this stage it may be appropriate to identify which is the core asset and which could be done without to protect that which was identified as a core asset. Things to weigh up in this instance are return on investment against potential for return as well as other non-monetary concerns.
Investments previously made in shares and managed funds may also be an avenue to bring cash back into the core business. Off farm investment is a good risk mitigation strategy with generally liquid reserves, which can be brought back into the business when needed.
Superannuation or Life policies are a source of emergency funds in time of financial crisis. Life policies can be cashed in if able to help fund deficits and superannuation funds will allow some withdrawals in times of financial hardship. Each fund has its own rules in these situations and these should be readily available upon request.
9. At this stage it may be appropriate to review how things are going and make decisions about the future
If steps 1-8 have worked, the crisis may be over and things are back on an even keel. It is now time to implement risk minimisation strategies to stop another similar crisis happening in the future
If 1-8 did not work, there is now a need for some important decisions to be made about the future.
It is now time to consider selling part or the entire farm!
Be prepared to act - failing to act is common - in a depressed state people try to escape from their problems by doing nothing but it doesn't work, it only makes the problem worse.
10. Now that the pressure has eased it is time to maintain tight financial control and to communicate with your financiers
You have revised you plans and are working towards a new future therefore it is time to manage this more realistic plan to ensure that the problem you have just come through does not resurface.
It is now also a good time to work on your relationship with your lenders to rebuild the bridges and gain their confidence back that was previously there but which may have suffered during the crisis. This will stand you in good stead in the future for the next time difficulties are experienced. Murphy's Law still prevails and therefore it is not a matter of if it will occur but when.
The Department of Primary Industries and Fisheries Farm Financial Counselling Service offers help in:
clarifying a problem or concern and working towards a solution.
understanding your financial position
identifying and assessing options for resolving financial and other problems
evaluating enterprises and assessing farm viability
finding information on rural finance
evaluating re-financing options
preparing loan applications
negotiating with your bank
preparing cash flows
finding information on Government schemes of assistance
accessing other service providers.
posted by mwesigye herbert at 8:02 AM
3 Comments:
Thank you for sharing your knowledge on business; it’s very helpful and informative. Managing small business also means managing its tax, and that is also important for us to manage business when we know how to handle the tax with tax planning in order to minimize the unnecessarily excessive expense for more effective small business management.
Small Business Tax Accountant Melbourne
Generally, we don't want to be in this Personal financial issues. But sometimes these emergency situations made us go into this financial crisis situation. However, our income source made us go for this emergency loans. But If our credit score is very less than we won't get loan approval from banks, At this time Bad Credit Loans is our only option which helps us in getting out from the problems. Choose the right lender who won't affect us in future.
Hey, nice blog. Sometime our situation demands us to go for these loans which cause us to cost our income source in the following years, However by controlling the expenses we can pay back our debt, But it won't happens like that any time. Going for this Personal loans without credit check may help us at that particular time. But plan your financial life well otherwise you are going to lose money than expected.
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