KEY POINTS:
Small and medium-sized enterprises should be careful about cutting costs now because of the impact that could have on future operations, says Michael Turner, a partner in the accountancy firm Polson Higgs.
The level of business confidence has a major influence on how decisions are made, he said.
Business confidence was holding up now but if it fell off in the next three months, it would have a major impact on the economy.
"People tend to take the positive approach when things are going well, looking for how to sell more product or expand into other markets as a way of lifting profit," Turner said.
"When things are a bit more pessimistic, people take fewer risks and look at cost cutting as a way of keeping profit up."
Most people accepted that there were costs that could be trimmed in a business, he said.
Cutting a marketing budget from $50,000 to zero would have an immediate impact on the bottom-line but would also have an impact on the business in 12 months' time.
If a business was streamlined by getting rid of some administration roles, it would place pressure on the remaining staff and the company could miss opportunities. That would cause problems in the future.
"Both expanding the business and cutting costs are viable options to retain profitability but the mindset changes as people become more pessimistic," Turner said.
This was regarded as a time of full employment but when businesses were asked if they were fully staffed, most would say they were coping but were still short of employees. Laying off staff as a way of cutting costs was probably not a viable option in these times, Turner said.
"I am expecting pockets of significant pessimism from highly-geared and exporting businesses and pockets of good optimism from areas like the rural sector. It is a bit of a mixed bag."
Many SMEs supplied the domestic market and the high dollar had no direct impact on them, he said.
However, the impact came depending on who their customers were and whether they were exporters.
The flow-on effect should not be underestimated.
"Avoid the knee-jerk reaction. Don't wait until the bank is banging on your door telling you the overdraft is $50,000. Don't wait until you post a big loss on your accounts. Plan now."
In tight times, people waited longer to pay debt and businesses needed to manage that as best they could, Turner said. If customers were under pressure, SMEs needed to look at how they could be paid first and that involved having good credit collection and credit criteria in place.
Setting up follow-up procedures for when a debt went past 30 days instead of waiting 90 days was one way of ensuring prompt payment.
"In the good times, people move away from rigorously imposing on themselves sound business practices like proper budgets and managing cash flow. Revisit those practices and look at every dollar and see if you really need to spend it.
"Deal with your suppliers and ask if there is a way of sourcing their product faster and cheaper."
Turner said planning for the future and looking at how things happening now could affect you in the future were ways of minimising the risk of failure.
- Otago Daily Times
