Cash is king in a business downturn | Sunday Observer

Cash is king in a business downturn

7 August, 2022

One of the key factors in weathering any storm is knowing that it’s coming and in what direction it’s moving. Keep an eye on the leading indicators for your business and be aware of changing economic conditions.

During times of recession such as now, cash flow management becomes more difficult than ever before while it is the biggest determinant as to whether a company would bounce back or fail. Cash is the lifeblood of an organisation, and cash flow management provides a barometer for how likely a business is to survive.

Inadequate cash reserves and realistic forecasting are often a reason why a larger percentage of startups and SMEs do not succeed. Often, poor cash flow mismanagement is the main reason why many SMEs eventually have to shut down. Being prudent may help save a business during tough economic times such as now. In a recession, cash flow management becomes even more important, as the saying goes “Cash is king!” Accurate or least near accurate cash flow prediction serves as an alarm system for potential future problems, which are rife in an economic downturn.

In periods of economic downturn, it is common for customers to take longer to settle their accounts, and for suppliers to tighten their terms. Appropriate forecasting by a business can help reduce shocks to cash flow such as those mentioned above.

This means expecting the worst and hoping for the best. Proper forecasting for a recession can be treated similarly to seasonal forecasting, where businesses predict slower sales in certain months (such as coat sales plummeting in the hot summer months). In the current economic climate, businesses should forecast for slower sales, meaning holding less stock, and driving sales through clever marketing techniques to try and counteract consumer’s unwillingness to spend.

Focus less on profit

How much ever it’s difficult under the present circumstances, forecasting cash-flow is critically important especially in a high interest rate environment. Understanding industry dynamics and determining the value chain may help a business find areas that can be optimised to improve cash flow. Using these techniques, businesses are better equipped to make reasonable predictions about future cash flow and funding.

Determine your breakeven point. Knowing when your business will become profitable gives you an early goal to strive towards, even if it is not directly linked to cash-flow management using fixed and moving costs. Focus less on profit and more on cash flow management.

When your breakeven point is known, you can focus on accounts receivable, accounts payable and your shortfalls. If cash flow is getting tight, asking for tighter payment terms from customers may improve your position. Maintain cash reserves.

Especially during a recession, a business’s very survival may depend on having cash on hand to maneuver through shortfalls. Best practice usually means having enough cash reserves to last a 3-6-month period but under the prevailing tough condition with more frequent dramatic changes, at least 3 months is a must but could vary on the industries you are in.

Easing off the burden

One way of mitigating shortfalls would be to extend accounts payable for as long as possible. This means paying suppliers on the longest possible terms without paying late fees. Boost sales with creative promotions and incentives on a self-liquidating basis.

Coming up with exciting ways to drive sales during a recession can not only increase profit through greater sales volume but may also improve reputation and customer relations if done correctly. Cost cutting thru elimination of unnecessary spending could help too. Some discretionary expenses should be critically questioned.

Managing your customers’ credit is an important part of cash flow management. Weed out unprofitable customers, those that cost more to maintain than they add to the bottom line. Flag those who have a history of slow payment.

Remember that you do not have to extend credit to anyone. If a customer has a history of slow payment, changing the credit terms or even eliminating credit entirely may be required. If it does become necessary to refuse credit to a customer, make sure this is done as tactfully as possible. After all, you do want to have them as a customer in the future.

Landlords, lenders, and contractors are not impervious to changing economic conditions so trying to renegotiate is worth a shot – don’t leave alone the bankers. If you are big you have bargaining powers.

Remember, the outflow part of cash flow is never a problem; money will always run out of your business easily. Keeping the money coming in on a regular, sustained basis is the tricky part of cash-flow management. One of the key factors in weathering any storm is knowing that it’s coming and what direction it’s moving. Keep an eye on the leading indicators for your business and be aware of changing economic conditions.

Just as having a healthy lifestyle and regular medical checkups can help you prevent, detect and manage health problems - such as heart disease - early, paying close attention to cash flow – your business’s life blood – can help you keep your business free of financial problems.

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