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Healthy Cash Flow During Challenging Times

May 28, 2020
Posted by: Stearns Bank

A healthy cash flow will always be the lifeblood of any small business.

That’s proven by a survey conducted by the Harvard Business Review that concluded “a majority of small businesses have less than two months of cash on hand” to deal with a crisis.

While not all situations affecting your business are of global proportions such as COVID-19, it’s important to know the liquidity of your cash to be prepared for any scenario.

Create a cash flow plan (or update your current one) by tracking movement of cash in and out of your business. Detailed cash flow statements collect information from operating costs, gains or losses from investments and financing payments.

Once created, the cash flow statement allows you to analyze how your cash is being handled and what changes can be made to eliminate unnecessary expenses or boost revenues. Here are five areas to focus on to provide immediate and long-term effects:

Adjustments For Immediate Impact

1. Review Receivables Process

If getting paid is an issue during economic highs, it will likely be worse when times are tough. Sarah and Darren Hendren of Hendren Construction, a commercial construction company in Salem, Oregon, have noticed a slowing in customer payments during the COVID-19 pandemic.

“People are holding back on the payments from their projects they have with us,” says Sarah.

Consider updating the way you send invoices and how often. Sending an invoice immediately after a project is complete, for example, instead of waiting for a specific day of the month, may encourage customers to pay sooner.

You can also offer flexible payment options, discounts for paying early, or even require a down payment for custom or complex projects.

2. Request Payables Flexibility

Vendors and suppliers are business owners too. And in economic downturns, they may empathize with your situation.

Ask for discounts or payment options from utility companies and creditors as well. Be transparent about your situation and you may find flexibility in the solutions.

3. Evaluate Expenses

The most obvious way to free up cash is to cut expenses. Payroll is often the No. 1 business expense.

Exploring options such as hiring or salary freezes may provide some much-needed breathing room in the budget. Sell extra inventory or reduce orders to keep inventory levels lower than usual. Take a hard look at office expenses that are “nice to have” items but not essential to the business.

Jerry Goodwald, owner of GEM-Ash Processing, a metal business in Rosemount, Minnesota, admits that revenues have been severely affected by the downturn in the market. Because of that, he has adjusted his cash flow model to eliminate what he calls “frivolous” expenses.

Develop Solutions For Long-Term Stability

4. Add New Products or Services

It may seem counterintuitive to spend money on untested products or services during lean times, but expanding business offerings can ensure future revenue. Adapting to changes in customer demands and market conditions usually provides a good return on investment, making it money well spent.

5. Fight for Sales

Being competitive is essential for reaching new customers. Review the current pricing structure for products or services that have a higher profit margin.

Determine a price that would be attractive to customers and still make the company money. For loyal customers, consider offering a referral program that provides discounts on future purchases. Take advantage of free marketing tools such as social media and positive business reviews.

Cash Still Reigns

As the economy changes the landscape of business, reviewing cash flow periodically and adjusting based on the current situation will give your business the best shot to weather the economic ups and downs.

A cash management plan offers that insight into valuation, efficiency and profitability of a business even beyond the current crisis.

As Goodwald said the Stearns Bank Small Business Podcast, “Ultimately, as a small business owner, cash flow is the most important thing you can focus on.”

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