Every business goes through cycles. For instance, the retail industry knows to expect increased business and cash flow during the holiday season in the fourth quarter. Florists and jewelers gear up for Valentine’s Day and Mother’s Day. In cold weather and rainy regions, construction increases during spring and summer, with winter being a slow period. Accountants buckle down during the influx of tax season work.
Beyond these obvious examples, entrepreneurs should understand and know how to capitalize upon inevitable business cycles. Things like finances can ebb and flow, and small business owners need to know how to manage, and even take advantage of, the times when cash flow is down.
Lights, camera, action!
According to the Harvard Business Review, “Inaction is the riskiest response to the uncertainties of an economic crisis.” However, thoughtless action can be nearly as catastrophic, so thinking before acting is a crucial step in recovery from an economic slump.
Tackling the challenges posed by cash flow fluctuations requires both defensive and offensive action. The steps taken should be based on identification and careful analysis of the business causes that created the cash flow downturn. Proceeding through this process of review, identification and analysis will help you manage your business through a cash flow downturn in order to emerge stronger than ever.
The Harvard Business Review recommends measured steps be taken with confidence and a positive outlook. Companies that take tentative steps tend to overreact later, cutting more costs than necessary, which makes it harder for them to make a comeback when the market improves.
Related: 6 Ways to (Quickly) Boost Your Startup’s Cash Flow
First, stabilize
When cash is low, management must first work to stabilize the company to ensure it can weather the slump. This effort requires liquidity, which means reducing the operating budget through severance of perks, some employee positions and unnecessary expenses like magazine subscriptions and unnecessary business travel and entertainment. For those startups already running lean, cost cutting won’t solve the problem, even if employees willingly agree to absorb salary and benefit cuts to save their jobs.
A downturn in business generally means that employees have reduced workloads. Enlist their help in identifying process improvements that could save time and money for your business and clients. Can you be more efficient?
Bring in your employees’ creativity to identify innovative and inexpensive ways to enhance marketing and increase sales. Is there a niche market you failed to identify previously? What are your competitors doing that keeps them in business? Conversely, what are your competitors doing that’s driving them out of business?
Economic downturns inevitably focus management’s attention on costs. Writing for Inc. magazine, Blair Thomas states that not all fixed costs are easily converted to variable costs; however, there are costs that can and should be adjusted. Don’t be afraid to negotiate better terms with vendors, as they many will be willing to accept lower payments or extended payment schedules if you are open and honest with them. Think about leasing equipment rather than buying it, hire seasonal, temporary staff and draw an updated budget to map out monthly and annual expenses, including taxes.
The difference between “cash flow positive” and profitable
A business can be profitable even if it’s drowning in expenses. Although your profit and loss statements show you are profitable, it is not the whole story, as it does not reflect your receivables. When clients fail to pay and the money doesn’t flow into the business, then expenses rapidly deplete cash reserves. In Fundera’s blog, the company outlines this scenario and the steps to take to alleviate the problem.
By regularly engaging in cash flow management and forecasting, you can more accurately predict the financial health of your business. A budget estimates expected expenses and income; cash flow management “can tell you exactly what’s happening — so you can prepare accordingly.”
If you can predict when money will be tight, then you can prepare for the downturn. Seasonal businesses understand the concept intimately and these startups manage their money accordingly to ensure there’s sufficient cash in reserve to pay the bills during those slow periods. Managing cash flow will also reassure lenders who want to know that you can pay them back.
Get paid faster
As the leading cash flow challenge, unpaid invoices are dreaded by businesses everywhere. Ensuring payment of invoices requires diligent follow-up and the imposition of penalties upon tardy payment. In addition, positive incentives such as offers of a discount to clients who pay early help get cash into your company quicker.
Another tactic to prompt on-time payment is to convert from mailing paper invoices to emailing digital invoices. Many software packages support digital invoicing and can even accommodate online payments and automatic payments. Suggest setting up automatic payments for retainer clients to offer them the convenience of not dealing with a monthly invoice.
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Alternative revenue sources
Downturns inspire invention. When your business hits a slump (predictable or not), creative, entrepreneurial thinkers stand a better chance of weathering the downturn than those who fail to act at all. While business is slow, take the time to consider diversifying your repertoire of services and/or products. If the expense of adding a new line of service or products exceeds your comfort, then think about a partnership with another business. Make the partnership attractive by offering cross-selling to clients of both companies, offering reduced terms for rented space, sharing in profits or charging a commission on the other business’ sales. The key concept relies on flexibility and creativity.
Taking advantage of opportunities may require investment even though money is tight. Carefully review the data, the pros and cons, and the feasibility of following through on a new course of action, to determine whether the investment is smart before making the decision.
Temper commitment with flexibility. One failed attempt does not guarantee permanent lack of success; however, continuing to pursue an unsuccessful course of action because you can’t quit will destroy employee morale and, possibly, the business. View the downturn as an opportunity and proceed with measured care to not only survive the slump but to position your company for greater growth and future resilience.
