Economic slowdowns, rising costs, tighter financing conditions, shifting demand, and more, can – and do – ruin once-thriving businesses overnight.
While small and medium businesses can’t control the broader economy, serious cash flow problems are not caused overnight, nor are they caused by any one thing. It is often a reflection of months or years of inadequate planning, limited visibility in financial and other reporting, or delaying tough decisions.
The goal is not to predict every downturn, but to position your business to withstand uncertainty and make informed decisions, to be in a position for long-term success despite uncertainty.
This means looking ahead, being aware of trends in your industry, and, at a bare minimum, ensuring that there is always enough cash available to meet those regular obligations, from paying employees to paying the government its HST, and payroll remittances.
Here are ten practical tips to help prepare your business:
1. Stress Test Your Business Regularly
Review your working capital, which includes your accounts receivable and other current assets, less your current payables, including trust tax payments and key vendors.
2. Treat GST/HST and Payroll Remittances Properly
Treat GST/HST and payroll remittances as trust funds and not as operating cash. These balances are considered trust money and belong to the government, not the business. If the business can’t pay, the directors may face personal exposure in certain circumstances. Set aside these funds as they are collected or withheld so they are available when remittances are due.
3. Maintain a Rolling Cash Flow Forecast
Most businesses will experience temporary cash challenges. A rolling 12-week cash flow forecast can help you see when cash may become tight and what actions need to be taken proactively. Update the forecast regularly and model different scenarios, considering both upside and downside. This becomes even more important if you have a few large customers or contracts that drive revenue and cash flow.
4. Secure Financing Before You Need It
Arrange for contingent financing before you need it. Having contingent funding, like a line of credit in place if needed, is a helpful tool for this situation. It’s easier to access a credit line before you hit financial difficulty, and there can be little to no cost to setting it up.
5. Reduce Customer and Collection Risk
Review your concentration of credit risk and collection risk. Do not rely too heavily on one customer or one contract for liquid cash. Consider how a delayed payment, cancelled contract or customer failure could impact the operations or your business. Review your accounts receivable aging, follow up consistently on overdue balances and consider whether credit terms should be adjusted for high-risk customers.
6. Review Fixed Costs and Discretionary Spending
If you are working on a contract-to-contract basis and have no significant new work on the horizon, consider making changes to your operations. Revisit your spending. Are there discretionary spending you can delay? There are also fixed costs to account for, such as rent, insurance, software, debt payments, and core staffing costs. If you can’t meet those obligations, you’re going to be in trouble. These are costs that are important to keep the business operating, even if they often themselves do not generate revenue directly.
7. Protect Margins and Know Your Break-Even Point
In a slower economy, some businesses bid lower to keep key employees working or maintain customer relationships. You should ask yourself, what impact is that going to have on your business? While it is important to cover the cost of keeping key employees in a slower economy, this isn’t a sustainable business plan. Understand your direct costs, overheads, gross margins, and break-even point before taking on discounted work. Make sure your pricing does not create losses that the business can’t absorb.
8. Watch for Early Warning Signs
Economic slowdowns are often preceded by signals, notably slowdowns in sales, reduced inquiries, pressure from suppliers or changes in customer behaviour. Consider whether early payment incentives, deposits, milestone billing or revised credit terms could improve cash flow. Track trends, make adjustments when necessary and plan ahead before problems become urgent.
9. Maintain Strong Relationships With Key Stakeholders
Ensure that you maintain strong relationships with your customers, suppliers, and lenders. Working with them can help you to manage your cash flow. Consider whether offering payment incentives, deposits, milestone billings, or revised credit terms could improve cash flow.
10. Be Proactive and Willing to Act Early
Don’t rely just on annual financial statements to run your business. They are based on historical information and you need to look ahead. Seek advisors who will give you sound, holistic and practical business advice and don’t just rely on past performance to assess the future. Don’t be swayed by sentiment.
To prepare for uncertainty, business owners should regularly review the financial and operational areas that affect resilience. These may include:
- Accounts receivable processes and collection timelines
- Cash flow forecasting and scenario planning
- Customer concentration and contract risk
- Supplier terms and payment arrangements
- Fixed costs and discretionary spending
- Pricing, gross margin, and break-even analysis
- Inventory levels and cost of goods sold
- Key financial ratios and lender requirements
- Operating lines, term financing, refinancing and other available credit facilities
Seek advice from your advisors to help you assess these areas, identify risks and develop practical steps to strengthen your business before a slowdown puts pressure on cash flow. As we say at GGFL, ‘See the opportunity behind your numbers.’
