Family businesses must always prepare for the worst

SINGAPORE- Many would say (and they have a point) that initially, family members are only active in family businesses because of the obvious reasons, like being able to receive extraordinary financial gains (which they could never receive from other companies), better treatment by their colleagues (non-family employees) and the opportunity to select their preferred line of duty and their freedom to maintain a particular lifestyle.

These are all undeniably true in most cases, but nonetheless, family businesses remain standing because the family members eventually learn the value of teamwork amongst themselves.

To prepare the family members to develop contingencies in the event the family business suffers a reversal, it is always helpful to be honest with everybody’s needs and opinions. A dialogue wherein every single family member will have the chance to voice out his/her needs and thoughts about the company’s situation and other specific issues that need to be addressed could be a healthy practice. Stressing the guidelines beforehand and doing consistent reminders are ways to preventing these from happening.

Below are some of the best practices of successful family and closely held businesses and the actions/steps they took which allowed them to weather economic upheavals:

  1. Focus on cash flow rather than paper profits.

Cash is king in business, and no company can survive for very long without generating positive cash flow. Cash flow is defined as a company’s cash inflows minus its cash outflows over a given period of time. Most closely held business owners think of cash as revenue less expenses. Sales may flatten or even fall while fixed costs remain static. If sales fall below the point where the company is able to produce a paper profit, it still may not be time to panic IF the company has strong and stable cash flow.

  1. Collect accounts receivable.

It may be acceptable to allow customers to pay with some flexibility in mind in normal times, meaning that you’re extending credit – often interest free – to your customers. But in hard times, you have to keep a close eye on accounts receivables to protect your cash and the family business.

  1. Focus on creditor relations, and keep them informed.

Creditors do not like surprises. Whether you’re doing well or whether you’re experiencing some recession difficulties, now is the time to invest a few hours in keeping your banker/creditor informed. Make sure you adhere to all your loan covenants, and meet face to face with your banker/creditor regularly. Work with your lender in a partnering rather than adversarial way to make sure they’ll be there for you if and when you need them.

  1. Compute tax payments accurately.

Most family and closely held business owners are focused on—if not obsessed with—avoiding taxation. The practice in some emerging economies like the Philippines is to come up with two, sometimes even three, books. One for the tax agency and the other books for the business owners’ personal information.

Their focus, however, tends to be on personal and business income taxes. There may be other tax reduction opportunities available. Make sure you’re taking advantage of all available tax credits. Make sure your internal or external CPA is using the most advantageous methodology for calculating quarterly estimated tax payments. Review fixed and leasehold assets to make sure they are being depreciated over their correct life for tax purposes. It’s often possible to reclassify certain assets to enjoy current rather than future tax deductions.

  1. Know your break-even point.

A company’s break even point is the point at which a product or service stops costing you money to produce and sell and starts to generate a profit for your company. It tells you at what sales volume the variable and fixed costs of producing your product or providing your service is recovered. In hard times, you have to know what your break even point. If sales fall below the break even point for an extended period of time, you’re in trouble. Every time you change the parameters in break even analysis, the break even sales volume changes. The parameters, then, are the factors which must be controlled by family and closely held business owners and managers.

My other advice to family business leaders: focus

Don’t be all things to all customers! In a complex marketplace, if you want to win and grow your market share, do not blindly target consumers: Target the most motivated!

Focusing your limited resources on those consumers with the highest motivation and propensity to buy what you are selling will deliver the highest return on investment.

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