As 2009 starts to draw to a close, the recession has not yet loosened its grip on small and medium sized businesses. And regardless of what the newspapers say, the recession is still very real and dangerous to your cash flow and will likely be for quite a while.
With that in mind, here are a few things to keep in mind when managing cash flow during a recessionary period.
1. Remember that you’re on your own. Whether your cash flow is in trouble or not, assume that you will get no help from your banker if the need arises. I’m not saying they can’t help you, but don’t assume that they will and make sure you’re prepared for them to potentially say no.
2. All the credit you have accumulated up to now that has proven to be more than enough for your business needs is not enough. I’m not going to say, go crazy and apply for credit all over the place. I’m more referring to 1) applying for credit with suppliers you don’t already deal with and 2) asking your existing suppliers for higher limits with the potential promise that you will do more business with them. In a recession, credit will dry up fast in the most unexpected places, so make sure you have good sources of credit to draw from.
3. You are your own bridge. Sometimes cash flow crunches in recessionary periods end up being short term gaps that result from delayed payments to you from customers, or a credit squeeze by a certain supplier that impacts you short term until you can source else where. In any event, if these clear short term cash flow gaps appear on the horizon, you personally are likely the best source of bridge financing. Why? Because the time period for the bridge is short (less than 6 months I’d say), so its not worth the time and energy to hunt down business financing at a time when its going to be difficult to secure anyway. Second, the less any one else has to know about your cash flow, the better. Having to go to your bank to explain a short term cash flow gap that you need their help with may just be opening up a can of worms. They may decide to help you, or they may decide to take a closer look at your business and perhaps decide that they’re already giving you too much credit and want some back, or who knows what else. Banks can be “fickle partners” in a recessionary time and its usually best to just keep everything low key with them until the economy gets back to normal.
But in order to be your own bridge, you need to have the cash available to inject into your company. So, either proactively get a personal line of credit against your house, or wait until you see a glimpse of cash flow trouble and then apply. If you already have some personal sources in place, great. Just make sure that the credit is available to you in the event that you need to use it for a bridge.
Personal real estate financing is the simplest, cheapest, fastest form of financing available to you, which by the way will still take at least 2 weeks to fund AFTER you have an approval, so fast is a relative word.
If you have good credit, even in a recessionary period, you should be able to get a prime to prime plus one line of credit up to 75% of the value of your home. And remember, the plan is to never use it, but if you need it, you have it to draw from.
A final point to mention here is make sure this is a short term bridge situation before throwing your own money in. If there’s no clear end to the other side or no bottom to the hole in the cash flow, I would strongly recommend keeping your personal funds out of it.
Remember that a bridge has clear well defined sides to it otherwise its not a bridging situation and needs to be looked at differently.
4. All Cash Is King. If you don’t already, offer your customers cash discounts for early payments if you extend credit to your customers. In a retail setting, offer discounts and sales more often to generate more cash flow and potentially give you an opportunity to reduce inventories. Yes, this will cut into your margins, but consciously taking actions to generate more cash flow may become critical down the road.
5. Match up Inflows with outflows. If you operate a business, like construction, where revenues and expenses are matched to individual projects, try to match your vendor payments related to a project to the inflows you receive. This may delay vendor payments which they won’t like, but if they know their materials were consumed by a particular project and you haven’t got paid yet, then they are typically more inclined to work with you, as long as you regularly communicate to them and as long as progress keeps being made on their account.
By taking this approach you will not be eating up available cash to pay vendors before you get paid (If you can do this at least some of the time, it can be a big help to your cash flow). If a delay takes longer than you had forecasted, then you may now have problems making the weekly or bi-weekly payroll.
Just remember that cash flow problems are out there waiting to happen. You can’t predict when they may impact you, but you can be prepared to deal with them if and when they occur.
Cash flow contingency planning can make the difference as to whether you come through a recessionary period unscathed or not.