Cash flow management cannot be ignored or abused during recessions

In September, Moses Singo and I focused on ways companies can grow during economic recession.

One of the golden threads in our editorials is that key role players will emerge, and their leadership during this period will either make or break the company. During our articles, we didn’t focus on the importance of cash flow management systems and processes during this trying period.

Monitor your spending

The Forbes article points out that one of the most important things that businesses can do to manage their cash flow during economic downturns is to closely monitor their spending. This means looking at every expense and identifying areas where costs can be reduced or eliminated.

For example, businesses can negotiate lower prices with suppliers, reduce staffing levels or cut back on discretionary spending. By taking these steps, businesses can ensure that their cash reserves are being used wisely and that they have enough money on hand to pay their bills.

Create a financial plan

The article adds that another key aspect of proper cash flow management during an economic downturn is having a solid financial plan in place. This means understanding the business’s expenses and income, setting realistic budget targets and tracking progress against these targets.

Companies can also take steps to improve their cash flow such as extending payment terms with suppliers, offering early payment discounts to customers or improving their accounts receivable processes.

Diversify your offerings and find alternate funding

The Forbes article points out that one of the biggest challenges that businesses face during economic downturns is a drop in revenue. However, there are steps that companies can take to mitigate this risk and improve their cash flow.

For example, businesses can diversify their product or service offerings, expand into new markets or explore alternative revenue streams. Additionally, companies can focus on improving their marketing efforts, building stronger relationships with customers and providing exceptional customer service.

The article adds that another way that businesses can improve their cash flow during economic downturns is by seeking alternative sources of funding. This could include taking out a line of credit, seeking investment from friends and family or finding a partner to invest in the business. Companies can also consider selling off assets or inventory to generate cash. However, it’s essential to carefully consider the long-term implications of these decisions and to choose the right funding source for the business’s needs.

Be proactive

Finally, the Forbes article points out that companies can improve their cash flow during economic downturns by being proactive and anticipating potential problems. This means monitoring the economy and keeping an eye on key indicators such as interest rates, inflation and consumer spending. Anticipating what will come can help you plan better and prepare alternate financing sources. Businesses can also work with their banks and financial advisors to ensure that they have access to the funds they need when they need them.

It is important to recognize that proper cash flow management is essential during economic downturns. By closely monitoring spending, having a solid financial plan, taking steps to improve revenue, seeking alternative sources of funding and being proactive, businesses can weather the storm and emerge stronger. While economic downturns can be challenging times, I’ve found that companies that are prepared and have a solid strategy in place are more likely to succeed in the long run.

Ensure you have a robust framework for managing supply chain risk

I also discussed this in a previous Turnaround Talk article, which focusses on a Deloitte report which points out that supply chain management is a complex challenge, and finance-related problems only add to the risk. Do you know if any of your customers are in trouble and might be unable to pay for the goods and services you deliver?

If you manufacture a product and want to sell it to someone outside your borders, you typically require a letter of credit from a prime bank that proves the buyer can pay. This letter of credit not only provides a source of ultimate payment, it can also be used to secure inventory financing while the goods are in transit—so it’s important to make sure these letters of credit are still reliable. Ensuring you understand the financial risks of your key trading partners, customers, and suppliers is a critical consideration in times like these.

Ensure your own financing remains viable

The report adds that, in these circumstances, don’t assume the financing options you previously had available to you will continue to be available.

Undertake scenario planning to better understand how much cash you’ll need and for how long. Use this opportunity to actively engage with your financing partners to ensure your available lines of credit remain available, and to explore new or additional options should you require them.

Focus on the cash-to-cash conversion cycle

The report points out that, under normal business conditions, companies primarily focus on the profit and losses–growing the top line while managing the bottom line. Routine back-office activities such as paying bills and turning receivables into cash are often taken for granted. In the current abnormal business conditions, smart companies are shifting their focus from the income statement to the balance sheet.

Of the three elements of supply chain working capital–payables, receivables, and inventory–, supply chain executives have a tendency to focus on inventory. But, in order to minimize working capital requirements during challenging times, it’s important to apply a coordinated approach that addresses all three areas.

Think like a CFO, across the organization

The report adds that, as supply chain managers step up to the challenges of disruption and inventory shortages, they generally spend their days thinking about operations and don’t pay much attention to finance and treasury issues. More often than not, inventory levels and other critical business parameters are driven by customer service requirements and operational capabilities, not financial constraints.

But what if the situation was reversed? What if working capital was the company’s primary constraint on inventory, and supply chain managers were given the challenge of making it work? How would that affect your supply chain and inventory practices?

A fine balance

The current challenges that companies face are interesting. Economic downturns call for significant austerity measures and downsizing. However, companies need to be wary that they do not downsize the company to the extent that it cannot take advantage of opportunities when boom markets return. Further, there needs to be significant investment in business digitisation for companies to remain relevant in the future marketplace. 

Now, more than ever, cash flow management is about smart decisions where pros and cons need to be finely balanced on a scale. Address your current challenges with an eye on future opportunities; economic recessions don’t last forever.