Financial markets are in turmoil around the world, bank lending has been cut, consumer and business spending will fall, businesses will fail due to bad debt and poor cash flows. Most of the western world will experience varying levels of recession. The length and severity of this is difficult to predict as is the likely impact on Australia. As a country we are better placed compared to many of our western trading partners due to a strong mining and resources sector and just as importantly a strong banking/finance sector.

In any case as business owners we must prepare for the worst without losing focus on the 4 pillars of the business:

1. Get the customer
2. Keep the customer
3. Collect the money
4. Do it profitably

In fact it is the four pillars that I will focus on in this discussion piece.

There is no doubt that bad times create challenges and at the same time opportunities. In the past I have provided insights into how different companies act in tough economic times. McDonalds for instance increases their advertising spend in recession as people “trade down” and opt for cheaper takeaway options instead of going out.

So what do I need to do?

Cash is king, you need to increase the liquidity of your balance sheet. The key measurement of this is your “Current Ratio” which is calculated as follows:

Current Assets
Current Liabilities

This measures the ability of your business to cover your short term debt which, as a reseller is typically your creditors (suppliers, vendors etc). Your current assets will typically be your debtors and cash in your bank account (Debtors will be a majority of this amount). The greater the ratio is over 1, the better the ability is of your business to be able to pay your creditors and keep your “head above water”. This is paramount in a reseller business and the ratio reflects many aspects of your business:

1. Margins/Profitability at a gross margin level
2. Collections
3. Expenses levels (suppliers other than Telcoinabox)

If you are making good gross margins your debtors should exceed your creditors, if your collections are good, you will have more cash and greater liquidity and ability to pay your creditors by the due date. Do not forget that all your suppliers will tighten their collections and therefore you need to be ready for this. In tough economic times, you have to ensure that you increase your liquidity and reduce your overall debt. As they say, ‘Cash is king” and this is always important but even more so in the current climate.

So let me link the 4 pillars to the Balance sheet and liquidity.

1. Get the customer: More people will be looking to save money. This will create opportunity and challenges. On one hand you should be getting out there and driving your business as you will find that businesses will be much more receptive to being approached. As you grow and as long as it is profitable and you collect it (put it all on Direct debit) your liquidity will increase. The greater your overall Gross Margin $$ are the greater ability you have to “weather the storm” e.g. bad debts. On the other hand, your current customers will approach you for better pricing as they get approached by other providers in the market. You need to be ready for this and forms part of the next pillar;
2. Keep the customer: Your customers will be getting approached by competitors and they will be more receptive. This creates two challenges, price decreases (see 4th pillar) and greater churn. Get close to your customers, be talking them and form a relationship with them. By doing this you increase the chance that they will call you if they are thinking about leaving and you have a chance to save them. Cross selling to your customer base will make them less likely to leave you and you should make this a priority as this also increases your profitability. Losing customers will reduce your overall gross Margin $$ and therefore effect your ability to stay liquid.
3. Collect the money: Everyone talks about it, everyone knows about it, but very few “live it”. You should be collecting in excess of 95% of your monthly bill out within 30 days. This means you have the cash to pay suppliers and also pay yourself!!! A number of Telcoinabox providers are consistently over 98% so it is possible. Remember, credit management starts at the time of the sale and in a daily weekly and monthly job. Putting as many people onto direct debit makes the job vastly different and also reduces your collection costs. It is simple, the more cash you collect the more liquid you are. If a customer is not paying, bar them, if you don’t your bad debt exposure increases and therefore hit to your liquidity.
4. Do it profitably: The main driver of improving your current ratio. The greater the margin the greater spread between your debtors and your creditors and therefore your liquidity. Look at your plans, look at your customers “Known Price Items” and work on prices that do not fall into this area. Look at your late payment fees, look at your “Total Service Other” and “Other Network Features” as quite often these are “Non-Known Price Items”. Cross selling as discussed in the 2nd pillar is vital to increasing your profitability especially if your are cross selling higher margin products such as mobile. If you are forced into reducing your prices for a customer/s ensure you get something it return, e.g. a 24 month contract. Never give anything away unless you get something of “equal” value in return.

There are many other ways to have an effect on each pillar, however I have been given strict space restrictions for this article, but I hope that this gives you an insight into how you use your balance sheet to ‘steer” your business and how it is linked to the four pillars of being a reseller.

Look at your expenses and conserve cash. Be ready to take advantage of an opportunity if it arises, call your customers, collect your money and cross sell.

Go hard, be strong and you will come out the other end in great shape and a lean mean business.

Author: Damian Kay
Email: damian@telcoinabox.com