“Most companies would, if they sat down and thought about it, have access to a lot of good information that helps them try and predict what’s going to happen to their business,” O’Brien says.
He says small businesses are at a disadvantage in this climate because, unlike the big corporations, they lack the resources and sophisticated tools that can make forecasts. But they can do certain things to plan ahead.
“What they should be doing is building at least basic financial models using Excel spreadsheets,” O’Brien says. “As a business operator, if they can’t build a basic spreadsheet or sheet that represents what the business does, then there are some fairly fundamental concerns about whether they should be running that business.
“Small businesses, including a milk bar or a 20-person manufacturing operation, should be capable of doing a basic Excel forecast model and the process of doing that is really not that complicated. It’s a very structured process where you look through the historical financial statements and the balance sheet history.”
He says this allows the business to create scenarios, including catastrophic ones like no sales for a year. In that instance, the company would have to look at its cash reserves to see how long it could keep paying staff.
It also forces them to draw up plans to create other ways of drawing revenue, like discounting, or going to other markets or changing production. “At least knowing what the critical threshold is means thinking about how they can mitigate it,” O’Brien says.
Michael Griffiths, director of business services and taxation at boutique accounting firm Prosperity Advisers, says constantly stress testing in this environment requires businesses to be across their monthly financials.
Griffiths says those that only process their results every three months as part of their business activity statement are running a risk. Similarly, they need to have their key performance indicators like sales targets in place.
“If you are just doing your balance sheet every three months then you are not close enough to your business,” Griffiths says. “Yes, you can calculate how much GST you need to remit and how much tax you need to remit, but you are not all over your business, you don’t know it as well as you need to know it.
“You need to have the KPIs each week, have the monthly financials done pretty promptly after month’s end, and then analyse the financials by comparing the actuals with your budget and saying here is what we did well and here is what we didn’t do well.”
Still, Griffiths concedes businesses can only forecast for a limited period of time. The days of three to five year plans, he says, are over.
“You can have three and five year plans but they are not going to have as much substance as they would have had 12 or 18 months ago, because things were pretty normal then, we were growing pretty well and we thought we knew where we were going.
“Anything more than 18 months now, and anyone would be dreaming.”
