Cash Flow Keys To Survival
Written by CMG News Contributor, Eric D. Glymph
In business, cash is King. You can be profitable but if you don’t have the cash to continue to fund your business you will be in trouble. During a recession, cash flow management becomes even more critical and requires daily attention to get through the short term challenges. What you must have is enough cash flowing through your business to provide you with the resources to give your customers a memorable experience. Focusing on cash flow survival requires focusing on six areas:
1. Manage your expenses closely
2. Manage your customer receivables
3. Manage your vendor payables
4. Know your Breakeven point
5. Monitor cash flow frequently
6. Anticipate cash flow needs
1. Manage your expenses closely
A recession forces you to look at what you have been spending in great detail. Review every expense, I bet you will be surprised at how much cash is going out the door for items you either don’t know what they are for or you aren’t using any longer. No expense is too small! Those $20/month expenses that didn’t seem like much can really add up – now is the time to eliminate!
2. Manage your customer receivables
The earlier business owners identify an economic slowdown, the better the opportunity to collect on outstanding customer receivables. As soon as you recognize business is slowing, you need to immediately focus on collecting any open Accounts Receivable (AR). Reach out to your customers and remind them of their amounts due. Make it easy for them to pay – via automatic ACH or credit card. Inevitably, you will encounter customers who can’t pay their amount due. Work with them to find a payment plan that works for them and for you. Getting some cash in the door is better than getting none.
3. Manage your vendor payables
The first thought in a recession is to stop paying all bills. However, it is important to prioritize your key vendors, the ones that are critical to keeping your business running. Once you identify the key vendors, review what is currently owed. If you can make a payment, you should. Reach to these key vendors and let them know you are still working and need their help. Discuss payment options – can you defer or spread out payments that are due?
4. Know your Breakeven point
Your breakeven point is how much cash you need to cover the fixed and essential expenses of your business. Knowing your breakeven point tells you the minimum cash you need to keep your business running.
5. Monitor cash flow frequently
You must have a system to understand your cash inflows and outflows and be able to review cash on a daily basis during a recession. Cash management is critical to survival and as a business owner, you can’t delegate this task to your accountant or even your CFO if you have one. You may need to be the one calling your key customers to close that sale or requesting payment. What is the best system? It is whatever system you are comfortable using that will allow you to understand your cash flow.
6. Anticipate cash flow needs
During times of uncertainty, it can seem impossible to look forward in your business and know what is going to happen tomorrow, much less 3 or 6 months in the future. But planning your cash needs as far out as possible is important. Create scenarios – what if sales recover by 25%, 50%, 90% from pre-recession levels? What actions will you take to meet those goals?Based on each scenario, how will you prioritize where your cash goes? Beginning to look to the future is critical to your survival even while focusing on the current moment.
Eric is the Owner and Founder of EDGe Business Planning. He has 20+ years of experience focused on improving the profitability of large, medium, and startup organizations with extensive knowledge on business planning, strategy, financial analysis, and budgeting throughout his career. To contact Eric directly, please email him at eric@edgebusinessplanning.com.