ckg newsletter / articles / Surviving the cash flow crunch

Surviving the cash flow crunch

A day rarely goes by without a news story about the struggling economy. Good business and proper financial planning are important but, more so in an economic downturn. Here are some steps that can be implemented to ensure that your business is protected during these unpredictable times.

1. Do a cash flow budget
The first step to improving cash flow management is to be familiar with your business balance sheet. The error many people make is to focus on their business’ profit and loss statements and forget everything else. This is a potentially dangerous mistake because whilst profit and loss statements reveal a great deal about margins, balance sheets reveal critical information about cash and liquidity.

2. Establish credit terms wisely
The need to extend credit to customers is a fact of life for most businesses, but it is important to set clear limits. Business owners should become familiar with the cash flow consequences of allowing customers to extend their payment terms. At the same time, there are positive cash flow effects of reducing payment periods of your customers.

3. Keep on marketing
As budgets get tightened, many businesses cut back on expenses and often marketing is the first thing to go. In tough times, the market becomes more competitive, increasing the need to become more vigorous with marketing activities.

4. Manage debtors
Make sure that your business has a clear policy for approving credit and collecting debts and that customers are aware of it. Most importantly, enforce it. Pursue outstanding debts with letters and phone calls. Be fair but firm – the customer you work with will remain a loyal one and work with you when the economy bounces back.

5. Invoice promptly
Ensure invoices are sent out in a timely and accurate manner. Check customer details to prevent unnecessary delays.

6. Monitor cash flow
Be wary of cash flow patches that may be coming and plan accordingly. Don’t forget about the seasons of your business. Equally, avoid funding major purchases from your business’ working capital unless you are sure you have the cash to cover it.

7. Use finance products wisely
Overdrafts, premium funding, lease facilities and cash flow funding products can all be excellent tools to help match a business’ cash supply with planned outlays if used appropriately. A business credit card can be a good way to manage a short term cash flow squeeze.

8. Maintain client relations
It’s difficult for businesses to attract new clients during an economic downturn. Therefore, it is important to keep your client base in order to stay afloat. Provide your clients with incentives such as loyalty programs to maintain regular contact. Measures such as these will ensure that your business survives during these tough times.

9. Think twice before lowering the price
In order to stimulate your business during difficult times, it may be tempting to lower prices. However, you will eventually be forced to increase these prices to cover the inflated costs associated with a recession.

Keep in mind too, that your suppliers may raise their prices as well - so try and negotiate a long-term discount with them.

10. Keep your valuable employees
As a slowing economy forces businesses to retrench workers, it is important to maintain a positive morale among your staff. Keep in mind, that with every downturn, there are opportunities to invest in developing further skills of your staff. In the end, it is their strengths and experience that will eventually carry the business through this tough time.

11. Think long term
Whilst you may be focusing on immediate cash flow issues that are impacting your business, don’t lose sight of the big picture. Apart from helping you to avoid decisions that might be beneficial in the short term, but detrimental in the long run, some long term planning may just keep you mentally prepared to overcome some of the obstacles that you may face.

12. Don’t panic and get advice
Most importantly, despite the recent downturn, the change is part of an economic cycle. Things will change and the most important action is to remain focused to ensure that your business is poised to take advantage of the upturn when it takes place. If in the short term things don’t go to plan and your business is at risk, seek advice without delay.