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Cash Flow Survival Tips During Recessionary Periods

Cash Flow Management Actions To Consider

When news breaks about a recession coming or present, perception becomes reality as consumers and business owners start to change their spending habits and prepare for what may lie ahead. In effect, the recession becomes a more prolonged reality because we make it one through our actions.

The primary action by consumers taken is lowering on expenditures, especially on non essential purchases or on larger items that can be put off for awhile.

Ok, so this is nothing earth shattering.

But as a business owner or manager, how do you choose to react to what is unfolding? Its hard to know how the collective recessionary impacts will ripple through an industry or sector with respect to timely and collective magnitude. So how do you decide what actions to take and what to prepare for?

Unless, you have little or no debt and have some sort of cash reserve at your disposal, I suggest considering some or all of the following.

Quoting Intel’s Andrew Grove, “Only the paranoid survive”. And from one of my former type AAA colleges, “in life, you can be homicidal or suicidal, I choose the former.” Point here is that its better to prepare for the coming storm, expect it will reach you directly, and take all necessary measures available to you to survive the impact.

This may seem a bit dark and paranoid (and it is). And there is a chance that a recession does not have a material impact on your business. But what if it does? Will you have time to react effectively?

The goal is to protect the life blood of your business …cash flow. Here are some actions to consider.

Being homicidal with respect to cash flow entails a number of things. First, the working assumption during recession is that sales, on average, will go down…that less money will be spent. So, in order to protect cash flow, you would protect inflows by offering sales and discounts on a regular basis and typically ahead of seasonal offers so that you get the cash first. Yes, you will make less margin, but you’re keeping cash coming in to pay the bills.

Second, on the outflow side, you should consider reducing inventories. The focus is on making sales early, not trying to maximize on sales late in a sales cycle or seasonal period.

Third, reduce fixed costs through layoffs and delay of major purchases. If you have to cut back on marketing, do so on the branding side, not on the direct response side that’s going to bring in sales. There is going to be strong competition for less spending dollars, so make sure you offers are well communicated to get your share.

Fourth, start to extend your terms of payment as much as possible. From a cash flow management process, always allocate resources to cover labor and fixed costs and manage any cash flow gaps with suppliers as much as possible. Cash flow management can be very stressful with many sides looking for money, but you must always plan out how to make payroll or you’re out of business. Many times, when cash comes in from accounts, its quickly paid out to bring things up to date with suppliers without enough being held back to assure payroll gets made in the coming weeks. As recessionary impacts ripple through supply chains, its typically the businesses that understand their cash flow leverage points and plan out contingencies that get through the period with less cash flow problems.

Fifth, bring your financing profile up to date, and develop a solid understanding of how you can obtain money if there is a shortfall. Business financing can take some time to secure and will be harder to locate during a recession so being prepared can be half the battle. Refinancing term loans and mortgages before problems exist can provide cash flow relief on a money basis that will cost you some additional interest over time, but basically serves as insurance against potential future cash flow problems.

Sixth, proactively determine what, if any, personal funds you are prepared to lend to the business. Use personal funds only as short term bridge loans that can come in and out in predictable fashion. If the business goes south, you want to have your personal resources available to you for future living expenses.

These are some basic steps you can take with your cash flow during times of recession. This is not an exhaustive list by any means, but more so a list to get you thinking about how to make sure your business gets to see better days after the recessionary period ends.

Your Recessionary Cash Flow Protection Plan

Here’s Some Tips To Protect Your Cash Flow During A Recession

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.

Cash Flow Protection Strategies For The Recession

Here Are A Few Strategies To Protect Your Cash Flow And Business During A Recessionary Period

I’ve previously talked about all the ways your cash flow can get side swiped during a recessionary period and how you need to protect yourself from these unplanned events .

Here are some strategies to consider to make sure your cash flow and company aren’t left for dead.  Remember that those who can get through a recessionary period relatively unscathed are in a great position to profit out the other side due to the fact that there’s going to be business to be picked up from the fallen.

Strategy #1.  Plan for a slow down by making as many of your operating costs variable and consider utilizing more contracting to further reduce your fixed overhead.  This may tax your operations a bit, but if cash flow becomes tight, you’ll have your monthly outflows minimized.

Strategy #2.  Make sure to spread your supplier business around and potentially take on additional suppliers even if it increases your costs a bit.  You never know when a supplier is going to go down due to their own credit problems and if you are relying on their trade credit terms for your cash flow, then you could very well get pulled into the soup as well if you’ve got too much dependence with any one source.

And just because suppliers are big doesn’t make them immune to cash flow problems during a recession. In fact they may be even more vulnerable if their balance sheet is highly leveraged and they have a few large customers that provide for most of their revenues.

Strategy #3.  Do not enter into longer term projects or entertain deals with new partners.  In some industries, like construction, many sub trades just go on vacation and shut down business all together because their experience tells them its only a matter of time before someone chooses not to pay the little guy when money gets tight.  More smaller jobs with faster turnover reduce the risk of too much cash being tied up in any one venture.

I’ll be back with a few more suggestions in tomorrows post.

The Recessionary Cash Flow Domino Effect | Business Financing Nightmare

Cash Flow Problems In Recessions Are Typically Caused By a Domino Effect

The recession creates the obvious problem of less sales for your business, but even if you’re in a mostly recession proof business, or one experiencing only a modest down turn, beware of what I call the cash flow domino effect.

This is most relevant to businesses that are part of large supply chains, but it can happen to virtually any business, depending on the circumstances, and all these triggers can be like falling dominoes heading straight for your cash flow.

Trigger # 1.  Someone in your supply chain or even a related supply chain gets into cash flow trouble.  They can’t pay their bills, which impacts the cash flow of their suppliers.  Now the suppliers customers will have their cash flow impacted and so on and so on down the line until the problem lands on your doorstep.  The more cash flow problems originating in the supply chain, the greater the domino effect and the more likely of anyone being impacted.

Depending on where you sit in the chain relative to where the first domino falls will likely determine how this impacts you.  In some industry this can be a complete company killer as business try to find ways to cover their operating costs and protect their credit until such time as the money starts flowing again.

Trigger #2.  Your business is doing ok despite the recession and everything seems to be in hand when all of a sudden your bank calls your loans or puts you into what they call special loans.  You’ve been a good customer for years and may have never missed a payment, but here they are with a knife to your throat.

Why would the bank do this?

Could be lots of reasons.  They may feel that they are over exposed in your industry right now and want to strengthen their portfolio by calling in some loans they know they can get their money out of without losing money.  You many be “offside” on one of your debt covenants which might be only marginal, but its an excuse to again reduce their exposure.  Or based on the current conditions, they have significantly revalued your security and now believe to be under secured based on the amount you owe them.

Even if they don’t call your loans, they can trim back your limits and still wreck havoc with your cash flow.  Remember that most operating credit is on demand and can be called or reduce on demand at any time for any reason.

Its just business, nothing personal.

But you still are in pretty good shape, so you’ll just do to another bank and get business financing some where else,  right?

Trigger #3.  In the middle of the recession, hardly any main stream lenders are lending any money and few are doing more than selectively helping out their existing clients.  So even though you have a viable business, you can’t get a low cost loan.  If you have assets to leverage, this could force you into more expensive asset based solutions  until the recession blows over and hopefully you have the margins to cover the cost or you could become Trigger #1.

As you can see, the cycle can feed on itself and increase the potential negative impact on your cash flow.

As we get into the last quarter of 2009, the dominos have been starting to fall and are building momentum in some industries and geographies.  How do I know?   All I hear these days when I answer the phone is a business owner explaining which trigger he’s just been hit by.

More on what to do to protect your business cash flow  in future posts.

Cash Flow Contingency Planning

What Contingency Plans Do You Have In Place To Protect Your Business And Cash Flow?

No matter how good things are going, something can go wrong that sends you side ways and without solid contingency plans in place, your cash flow and business could completely disappear.

Now contingency planning is for stages of stability and growth. If you’re cash flow is already in trouble or going to be in trouble very soon, then its not contingency planning, its crisis management.

By this definition, you may ask why you need to even bother going any contingency planning. If everything is going well and perhaps has been good for a long time, why dedicate time to this activity.

Here’s a real world example.

Customer imports a product and repackages it under different consumer brands, has been profitable for 20+ years, does over $10.0M a year.

Great cash flow model where suppliers provide 90 day terms on product imports and receivables are collected in 60 days. Operating costs covered by a long standing line of credit.

Everything runs like a well oiled machine.

Then the recession hits. And all the suppliers cut back their terms from 90 days to 30 days.

Big problem. Totally unforeseen. Right before prime time of this seasonal business. If it can’t be corrected quickly, the business is all of a sudden in big trouble.

The end of this story was that the business did find a way to stabilize the ship, but there was no contingency plan to draw from and as a result the business was not only in distress, but on the verge of losing customers. The problem was solved through pure crisis management, which can work, but is unpredictable and typically more costly than drawing from a contingency plan designed for a cash flow shortage.

The big problem with me preaching contingency planning is that I’m preaching prevention, not cure. Its like telling you to back up your computer everyday or buy life insurance or brush your teeth before going to bed.

And as a result, I’d say 90%+ of businesses don’t have any type of meaningful cash flow contingency plan.

Perhaps that would change once business owners and managers understood the risk they aren’t managing. Maybe.

In reality, most business financing is crisis managed or what I like to call unplanned events.

I’m going to talk about cash flow contingency risk assessment and prevention in future posts. For now, I’d just suggest that you take a quick look around your cash flow and see if there is anything that can be flagged as a high risk to your business. This is definitely a worth while exercise and should be done at least a couple times a year.

Income and Cash Flow Forecasting Is Both Art And Science

Forecasting Business Cash Flow And Income Has A Lot To Do With Both Your Experience and Intuition

Yes,  cash flow and income forecasting can be a pretty mechanical process as all the numbers have to be entered and tabulated and assessed.  But when you’re looking into the future, the numbers also have to be projected, guessed at, and pulled out of the air to some extent.

That’s where both your experience and intuition comes into play and it will amaze you how both improve your accuracy over time.

When I was managing an annual cash flow that was well in excess of half a billion dollars annually, I got pretty good at estimating where the ship was going to dock and how we were going to hit “the number” decreed from the ivory tower by people so removed from what was going on they may have been on another planet, or at least it seemed like that some times.

I had a large staff, reports, and systems out the wazoo, so you would think this was all highly mechanical, which in many ways it was.

But when it came down to determining which actions to take in the next 30 -60-90  days to make the overall cash flow and income projections work, it always came down to my estimates and guesses of how certain items, both inflows and outflows would play out.  Basically my estimates or key assumptions of how things would play out in real time.

And in the real world, you will always have to guess because there’s always unknowns, curveballs, and goof ups to deal with.

So why go to the trouble of creating cash flow and income forecasts if you’re just dreaming it up anyway?

You do it because through the course of continually going through the exercise of reviewing everything that matters to your targeted outcome and summarizing each component down to time and dollars, you develop the ability to accurately estimate how everything will unfold.

Intuition is nothing more than your minds ability to draw on lots of self absorbed data and apply it to a repetitive ritual that generates a realistic result of what is yet to occur.

The more you feed your brain with the key measurements of the business and the more you go through the assessment cycle, the more accurate your guess work will become.

And in many ways, this is the secret of some of the world’s most successful people who always seem to make the right decision most of the time or when it matters most.  They have spent, in many cases decades, feeding their own super computer all sorts of relevant data about their business, competitors, the market, the economy, and anything else that could have an impact on what they do.

When you’re field of vision is wider than your competitors, when you can instantly see and assimilate relevant information into the right decision most of the time, then you have developed superior intuition.  And by acknowledging this to yourself and utilizing it to your benefit, you are practicing both art and science to achieve a greater outcome.

Back in the corporate world, there were only four days in the year that meant anything… the end of each fiscal quarter.  And everything that took place between those dates was to achieve the quarterly target that lay just ahead.

People used to ask me what it was like to come up with the plan to get to the number and then manage to it.  Because everything was such a moving target, moving at real world speed, I would say it was like trying to throw a brick through the open window of a speeding car and having it go right through the car without hitting the driver as it went out the other side.

But every quarter, I hit the number.  I can’t say it got a whole lot easier, but as time when on,  I made better plans to get to the results, as more and more things came into my field of view.

As a business owner or manager, you may view forecasting as a waste of time or a use of time you don’t have.  But you need to find the time to work it into the mix for by so doing, you will greatly expand your intuition and become much more accurate in your decision making without even realizing why.

You don’t necessarily have to do it all yourself, but being involved in the process can create a powerful benefit to you that will leave your competition scratching their heads when you always seem to be one step ahead of them.

Key Elements Of Cash Flow Management

Here Are The Most Important Elements Of Business Cash Flow Management

Let me outline the exact areas you need to focus on when performing cash flow management in your business.

But before we do that, just remember that cash flow management is one of the three primary business finance pillars all businesses focus on to some degree to be successful. The first pillar is securing capital, the second is cash flow management, and the third is cashing out on exit.

Back to cash flow.

I’m sure you’ve heard it a million times that cash flow is the key to any business. Nothing new there. But, what goes into managing a businesses cash flow and how do you make sure you’re focusing in on what’s important?

First, lets define this further. I define cash flow management as anything that has to do with money in your business including who its owed to, who its owed from, money spent on assets, money given to charities, paid in taxes, and on and on.

Cash flow management must have an all encompassing discipline to it or its likely going to be a waste of time. This is the first key element that you need to consider.

Too often, business owners track certain inflows and outflows and ignore others viewing them as not material or insignificant, or perhaps not wanting to admit that they are significant. When things are going well, a certain amount of overlooked items doesn’t really matter, but when things are not going well in the business, even a small amount of unaccounted for expenditures can become painful when it comes time to pay the rest of the bills.

The second key element is developing a cash flow management tool, even if its on a spreadsheet, to keep track of all inflows and outflows. This is effectively a dashboard into the business, equating everything into time and dollars so that you can proactively manage the business operations. Even when people go through the effort of building out a cashflow template, many still make these two very serious mistakes.

First, they allow too much time between reporting intervals. If you have a spreadsheet with inflows and outflows, you will typically have columns for the period of time. If you’re cash flow is tight, the reporting period needs to be shorter, like a week. There can be too much variability over the course of a month for this interval to be accurate to you in tight cash flow situations.

Second, they don’t forecast far enough ahead. At a minimum, especially if you are working with longer sales cycles or in a period of growth or decline, you should be forecasting at least 3 months ahead or even longer. This helps to see trouble on the horizon and gives you time to proactively deal with a projected issue while staying out of panic mode.

The third key element is to assign one owner of the cash flow management process and make it a requirement that the cash flow gets updated at least once a week. By having one person at the controls, the information will be more accurate and you also have someone, even if its yourself, to hold 100% accountable. Problems usually start when there are too many cooks sporadically updating information and making assumptions as to what someone else has done.

The fourth key element of cash flow management is to be ultra conservative in your projections of the future months. Expect income to come in slower and more expenses to appear than planned. This creates an internal buffer for when things go wrong, which they always do.

The fifth key element is to assign time and money to everything that happens in your business so you always have a solid picture of where you’re at today and what the near future looks like. Cash flow management is also part measurement in that any project you have or take on, should have precise cost and revenue projections and time lines, which all gets filtered into the master cash flow and your decision making process. Before a project can be approved, are there funds available in the time required? What is the expected payback period? When the results of a project or contract come back, did they meet or exceed the expectation, and if they did not, how are we going to deal with the cash short fall?

If comes back to the old adage, if you can’t measure it, don’t do it and everything needs to be funneled back into your cash flow management system to effectively be measured.