Businesses across the energy sector are increasingly adopting a lean approach to cash-flow to improve their resilience to the challenges the low oil price continues to bring.
While the concept of break-even is not a new one, too few businesses understand their cash break-even.
It’s the point at which a business is trading at a cash-neutral level, recognising the need to generate sufficient cash to cover operating costs and items such as loan repayments and the capital element of financial lease payments – and represents the minimum level of sales required to ensure the cumulative cash position is not deteriorating.
It’s also a great way of identifying the impact of changes in gross margin, as even a 1% or 2% swing can have a major impact.
Identifying where cash is currently employed within the business and creating a plan of action is the next major step, reviewing and optimising working capital, applying effective credit control processes, looking at innovative ways to reduce supply-chain and logistics costs.
Bargaining hard and asking for cash discounts from suppliers for early settlement of account, enhancing controls over purchasing and order processes and introducing greater senior management accountability – leaving no stone unturned when looking for and eliminating cash waste.
It is also the point to consider which customers, products and channels are the most profitable and to ensure cash is channelled towards supporting those activities.
Are there projects that should be deferred until the economic outlook becomes clearer? Are all ongoing investments critical to the business or should they be stopped or delayed?
Employment costs often represent the biggest cost heading for businesses and, while it may seem to be a compelling case to make redundancies there can be significant short-term costs associated with trimming the wage bill.
Losing skilled employees may also damage the company’s ability to take advantage when market conditions do improve.
Now is the time to examine alternatives such as altered working patterns, banked hours schemes and flexible working arrangements so that you can match capacity with customer demand without increasing costs.
Tough decisions continue to be required to successfully manage businesses through this downturn, but with careful planning, a rigorous approach to cutting out waste and a focus on the business critical activities, your business could well emerge in much stronger shape.
Alistair Black,is head of consulting at Johnston Carmichael
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