How to manage cash flow in a stressed economy

For a few years, we have all been watching the skies for the economic indicators that would signal a recession. After an extended expansion economy following the 2008 financial crisis, many economic forecasters believed a recession was imminent.

Then 2020 took everyone by storm. Not only have we been faced with the toll of a global pandemic, we’ve also seen international and domestic unrest, unemployment, oil price wars and more. As we wade through this turbulence, we may need to buckle up for an extended economic downturn and recession as we search for a COVID-19 treatment and transition back into a more robust labor market and revived consumer demand.

Below are some key financial considerations for businesses as they operate in a stressed economy.

Business cash flow is critical

Cash and liquidity are king in today’s business world. Many business owners focused much of the spring on employee and customer safety measures, supply chain constraints and taking stock of liquidity. Now is the time to focus on adjusting expenses and processes to generate and protect business cash flow.

Assess your current cash and income sources

Business profits are not the same as cash flow, so don’t look to your profit/loss statements to determine if you have enough cash to cover you. Now is the time to dig into the details of your business’s financial statements to see what you have in cash reserves each month, and what your income/payment cycle looks like.

Your cash flow projections should be able to tell you the cash you have right now, and a projection for what your cash will likely look like in six months. If you’re in an industry with long payment cycles, like freight or leasing companies, you will likely need to forecast more aggressively to truly see what your business cash flow and income amount to.

Protect your cash and liquidity

With the market up and down, uncertainty rules the day, which means maintaining enough cash to handle your day-to-day operations is critical. Defending your cash may be just as important as generating it as we look at a potentially longer recovery timeline. Some strategies to consider include:

• Pausing some larger or long-term business plans that involve taking on more debt. Granted, some debt may be necessary to adapt your business to new challenges. But it may not be the right time to expand, add locations, update equipment, etc. if you don’t have a healthy cash reserve to lean on.
• Tightening your accounts receivables processes to clean up your payment pipeline. This could include reducing or halting consumer credit extension programs, creating and applying standard late payment fees and ensuring invoices are accurate from the get-go.
• Innovating for digital payment acceptance to access payments faster. If your business cash flow still relies on paper—paper invoices, paper checks, paper anything—it could be significantly slowing your payment cycle.

Analyze spending needs

No one likes budget cuts, but nearly all businesses need to implement them at some point. If you haven’t yet revisited your 2020 budget, you are overdue in facing the music. What may have looked like a perfectly reasonable allocation in December 2019 is likely no longer on the docket for the year. Conversely, funds you may have set aside for a new project may have been absorbed into expenses related to the pandemic.

One tip to consider: don’t just start slashing willy-nilly. Being strategic about budget cuts now can help your business recover when the market picks back up. Start here:

• Review costs associated with production or supply chain. Are there opportunities to scale back or be more efficient?
• Analyze fixed expenses. (Are they really fixed?) For example, look at insurance policies, subscriptions, vendor services and retainers, and start conversations to trim where possible.
• Innovate your marketing techniques. A knee-jerk reaction could be to cut large funds from marketing, but that could hamstring you later. Instead, consider ways to cut costs by optimizing digital and social opportunities during this time of digital living and shopping.

Consider ways to generate cash

Once you have a handle on your current business cash flow, you can turn your eye to generating more income. While it’s a tough market for many industries, it’s important to stay nimble, highly aware of customer needs and strategic in your decisions. Even if your business is struggling to capture new clients, there may be some ways to optimize sales and access cash.

• Consider adapting sales processes for a new consumer. Your client audience is likely facing just as many challenges as your business in the current environment. It may be helpful to employ some of the business tactics used after the 2008 crisis, like creating or extending return policies and satisfaction guarantees to help purchase-worried customers feel more confident.
• Rethink pricing. It may make sense to review your pricing structures—whether it’s to increase, decrease or restructure. For instance, some companies have shifted to a subscription model to help produce fixed monthly income while enticing clients with a fixed monthly expense.
• Consider selling or refinancing your business assets. While it may not be the most enjoyable option, selling unnecessary equipment or other assets could help boost liquidity. And, with interest rates still low, it could help to consider refinancing real estate or vehicles to potentially reduce monthly payments and optimize interest payments.

As you take stock of your liquidity and consider strategies for the remainder of 2020, now is the time to be in touch with your business banker. Your banking partner can help your plan for managing market uncertainty and help you build contingency plans for liquidity, debt management, accounts receivable tactics and more.