Managing cashflow is an everyday challenge for most managers in small and medium sized businesses. Those managers who keep a close eye on their daily activity and emerging industry trends can help reduce their company’s exposure to the chill of a cash crunch.
How can you predict, avoid and/or, minimise the impact of a cash crisis in your business?
First, pay immediate attention when any cash shortages arise. When cash gets short, pay close attention and be prepared to act quickly. Questions to be focused on are simple:
What caused the problem?
Pre-payments to take advantage of special discounts can reduce cash. Haulage and logistics issues or strikes, for example, could delay shipments and therefore payments. An industry wide (or as we have seen in the last few years, an economic) slowdown will often result in customers stretching out their payments.
What is the impact to the business and how can you cope with the shortage?
If cash on hand is not robust, let the special discounts go. It’s usually more cost-effective to pass on a discount than to borrow to overcome a shortfall. Keep up on the news. If you hear about any threatened strikes and/or disruptions to your supply chain, make sure you have a back-up position. Even if temporarily more expensive, it can save your business by showing your customers your reliability and versatility in challenging times. If your customers are in industries facing hard economic times, keep closer tabs on your credit policies and be active in collections. If necessary, tighten credit terms, but use discretion. Being firm but supportive to your customers will go a long way in keeping them in the fold while still giving you a better cashflow. Defer purchases and/or negotiate extended payments if cash gets short.
Most importantly, document both the signals of problems and your solutions. That way, if the signals happen again, you can refer to prior successful action as a first possible solution.
A Possible plan?
Imagine possible, but normally unpredictable cashflow challenges. Some problems can’t be anticipated, so ‘what if’ scenarios can be created. You don’t have to get elaborate, but you can ask what would happen if there were a flood, or, as we’ve experienced more recently, a devastating hurricane. What then? Other problems, such as “product sabotage” can only be dealt with as they occur. Constructing possible scenarios to reduce risks associated with ‘unforeseeable’ problems is an important management tool. Learn from, and document, each experience, or you may have to repeat it.
Examine your sales.
Any prolonged (and “prolonged” means different time-scales for each business and often differs sector to sector) drop in sales without a comparable — and simultaneously emerging — reduction in expenses is a prescription for trouble. Of course, there is at usually some lag between sales changes and a compensating contraction in expenses, but early diagnosis can reduce the negative impacts significantly. Once a changing trend has been identified, act promptly or the impact of the lag will be more severe.
Review your budget.
If short-term borrowing is regularly needed to meet normal operating costs, the unavailability of such loans or a sudden change in operating expense could be devastating.
If ongoing operations cannot be supported by sales, either more sales are needed, fewer expenses must be incurred or a combination of the two is in order. While this sounds very simple, all too many companies hesitate “in hopeful anticipation.” If remedies are not introduced on a timely basis, a severe cash crunch could follow.
Keep a close eye on new product development.
In many companies, R&D expenditures for new products are often allowed far greater variance from projected budgets than normal expenditures. After all, when you create something new, it is really hard to accurately predict costs — or turnaround time — at the outset.
Failure to keep these costs, and time commitments, within bounds or monitor their continuing impact and cost/benefit can lead to continued funding of projects well beyond when they should be cut off. Overall cashflow can be easily drained into a seemingly bottomless pit, and often an entire company is jeopardised by one errant project.
Finally, beware of pet projects.
A pet project is any organisational activity undertaken for ego value rather than consistency with the organisation’s mission and profit targets. Pet projects, whether new ventures or ongoing cost/profit centres, can often lead to cashflow problems. All organisations have pet projects from time to time. Failure to recognise and deal with a pet project when a cash crunch looms has been the death knell for many companies.
Many cashflow challenges have such simple origins. Often it’s simply a matter of days, or weeks and they can creep up on you. And the daily grind can cloud your vision, encourages false hope or distract you just long enough for problems to take hold. You can learn from past and/or current cash shortages. You can be watchful that sales, budget and R&D costs stay in line. You can keep a lid on pet projects. In an increasingly competitive world, you need to be alert.Download this article as a PDF