Ian: Welcome to the Business Coach Podcast, an advice-oriented series that tackles the top issues and opportunities facing Canada’s small businesses. I’m your host, Ian Portsmouth, the Editor of PROFIT Magazine and we’ve developed this podcast in cooperation with BMO Bank of Montreal.
For many entrepreneurs, November and December are the months they roll up their sleeves and draft their strategic plans for the following year. But that’s a tougher task than usual going into 2009 given the current volatility of equity, commodity and currency markets and the rapidly deteriorating economic outlook. In this episode of the Business Coach Podcast, we’ll explore ways to overcome all of this uncertainty in the planning process with Michael Epstein. He is the managing partner of Fuller Landau LLP, a mid-market accounting and advisory firm based in Toronto. Michael, welcome to the Business Coach.
Michael: Thank you Ian. It’s a pleasure to be part of your show.
Ian: So Michael, quickly, what are some of the unique or uncommon challenges that 2009 is likely to present to Canadian companies from the planning perspective?
Michael: It’s a great question. For many Ontario based business people, the last two years have shown the volatility of change. And things like the foreign exchange rates and the credit markets, rising cost of raw materials and consumer confidence. The volatility is something for many people’ career over a decade they have not experienced. So the importance of planning, understanding your strategic goals at a macro level, you know, think through the concept of planning at a macro level, it gets to gradualize certain activities like constantly staying close to your customers, understanding whether they have credit support from their lenders, so if you ship, you feel you have a higher degree of confidence you are going to get paid and you can work through perhaps new sales programs, marketing programs with your customers. And the flip side getting close to your suppliers in terms their status, whether you can extend terms of payment, redefine supply of goods in terms of the frequency and quantity of deliverables could be equally important based on what your customers are doing.
In addition to that, another critical, critical and vital area of management is staying close to your bank. You know, in a period where credit markets are tightening and certainly, the cost of borrowing has increased anywhere from 50 to 200 basis points over the last year, it will cost you more to borrow hence you have to derive greater profits out of your own operation, you want to be a good friend to your bank and vice versa because as things improve, and hopefully, things don’t deteriorate, you want support and you want to know that the credit culture within your lending organization is there to support existing relationships.
Ian: Great. Now earlier on, you mentioned currency fluctuation and that’s certainly been a big thing for a lot of companies especially exporters. Now, I guess one way to even all of that volatility out is by currency hedging. Is that something that you would recommend people do more of in 2009?
Michael: Every business is different and has its own challenges to itself. Before examining whether hedging is an opportunity for you, you have to understand seasonality of your business, when you spike in terms of terms of payment with your suppliers based on your inventory flow, hedges come back to solid fine-tuned cash flow planning. And if you can see through to the fact that, as an example, you are going to need 2 million U.S. dollars within a very short defined time frame and you know that that’s going to happen 120 days out, foreign hedging is a great opportunity. Because it gives you cost certainty if you’re a buyer of foreign dollars to lock in whenever your gross profits are for a period of time. You could be a looser or a winner depending on the fluctuation. To me cost certainty today is a winner.
Ian: Now of course, working capital, especially going into a recessionary period is extremely important. What should entrepreneurs be doing to preserve healthy levels of working capital, things like closer monitoring of their receivables?
Michael: Correct. Vitally important and should be scrutinized depending again on seasonality and nature of the supply chain and when you have to deliver goods. Sometimes, cash flow planning should be reviewed and monitored if not monthly, every two weeks. But some of the techniques or some of the things to focus on are again visiting your customers and understanding whether current limit will have to be changed as a result of the new environment that we are in. On the supply side, understanding whether you can in fact negotiate better pricing, better terms of payment and better delivery schedule to smooth out your cash flow. In between all of that, of course is inventory. And you know, you always want to be lean in inventory but you constantly have to be pruning and dissecting what’s in inventory, what’s moving because inventory is cash. And the faster you convert your inventory to cash, obviously the healthier you are.
Ian: Now, how much more does timely and accurate financial reporting become in turbulent times?
Michael: Timely and accurate reporting is always important but obviously, more important in turbulent and volatile times because it’s the basis for decision making. You know, without the accuracy and the integrity of data, you know, you rely on that data to make decisions. And if you are making decisions on inaccurate data, you know, there are a lot of risks associated with that. So the quality, the timeliness allows you to be pro-active in mitigating potential problems going forward, anticipating problems. It just gives you a solid based-fine platform for analyzing your business on a consistent, frequent basis.
Ian: Now let’s presume that there are, you know, probably more than a few companies out there that aren’t particularly timely in their existing financial reporting practices might be a little bit “loosey-goosey” on the numbers, is there anything that they can do rather rapidly to shore up their reporting?
Michael: Well, if it is a question of frequency, it’s just really communicating with your internal account controller, CFO, whoever your internal manpower, so to speak, to say we have to escalate this on a frequent basis and not only report faster but meet faster. If you are lacking resources whether people or software or something like that, let’s find out how to, you know, mitigate that weakness right away and deal with it because information is power, so to speak, it’s an expression and information is knowledge and without that knowledge, accurate knowledge, can’t make decisions that may impact your business in a volatile period.
Ian: Now most companies come up with an annual plan and I would say better run companies do quarterly strategic plan. Does the volatility today mean that companies need to go through this process and review their plan on an even more frequent basis than every 90 days?
Michael: Well, I think that the macro strategic goals of most businesses don’t change, you know, on an annual basis based on, let’s say, a two to three year plan. However there may be tweaking and adjusting. And you can’t react impulsively to the economic changes that are going on as rapidly as they are because you could make mistakes. I think part of the exercise and planning involves sensitivity analysis or what if analysis. The more what if analysis you can do quarterly, the better you’re able to make the decisions when and if economic changes impact your business. So, you know, I am a manufacturer, 50% of my customer base is in the U.S., the dollar goes back to par in 30 days. Do I have the ability to scale down my fixed cost infrastructure in a short period of time to weather it through if there is a drop off in sales? You know, the drop off in sales may not respond that quickly but is my business nimble enough to down size to a certain extent and scale up when orders start coming back? And your flexibility as a business is a function of your planning.
Ian: Michael, it sounds like the mantra for most businesses in 2009 should expect the unexpected. Thanks for joining the Business Coach Podcast.
Michael: Thank you very much. I appreciate it.
Ian: Michael Epstein is the managing partner of Fuller Landau LLP, a mid-market accounting and advisory firm. He joined us from his office in Toronto.
That’s it for another episode of the Business Coach Podcast. Be sure to check out other episodes which you can download from BMO.com, profitguide.com or iTunes. If you have any comments or suggestions about the podcast, please send them to me at firstname.lastname@example.org.
Until next time, I am Ian Portsmouth, the Editor of PROFIT Magazine and I wish you continued success.