Cash flow management can be one of the biggest determinants as to whether a company flourishes or fails.
Inadequate cash reserves and forecasting are often a reason why startups and SMMEs do not succeed. Often, Cashflow mismanagement is the main reason why many SMME’s eventually have to shut down.
In a recession, cash flow management becomes even more important, and being prudent may help save a business during tough economic times.
As the saying goes “Cash is king!”. Cash is the lifeblood of an organization, and cash flow management provides a barometer for how likely a business is to survive.
Forecast: chance of thunderstorms
Cash flow analysis is often difficult to relate to critical business decisions. At the same time, accurate cash flow prediction may serve as an alarm system for potential future problems, which are rife in an economic downturn.
In periods of economic downturn, it is common for customers to take longer to pay their accounts, as well as for suppliers to tighten their terms. Appropriate forecasting by a business can help reduce shocks to cash flow such as those mentioned above. This means expecting the worst and hoping for the best. Proper forecasting for a recession can be treated similarly to seasonal forecasting, where businesses predict slower sales in certain months (such as coat sales plummeting in the hot summer months). In the current economic climate, businesses should forecast for slower sales, meaning holding less stock, and driving sales through clever marketing techniques to try and counteract consumer’s unwillingness to spend.
Analyze the past to predict the future
Effective analysis of financial statements may help to create a better picture of future forecasts.
Understanding industry characteristics and determining the value chain may help a business find areas that can be optimized in order to improve cash flow.
Using these above techniques, businesses are better equipped to make reasonable predictions about future cash flows and funding.
Tips to maintain cash flow
- Determine your breakeven point. Knowing when your business will become profitable gives you an early goal to strive towards, even if it is not directly linked to cashflow management. This can include a units-based or Rands-based analysis using fixed and moving costs
- Focus less on profit and more on cash flow management. Once your breakeven point is known, you can focus on accounts receivable, accounts payable and your shortfalls. If cash flow is getting tight, asking for tighter payment terms from customers may improve your position.
- Maintain cash reserves. Especially during a recession, a business’s very survival may depend on having cash on hand to maneuver through shortfalls. Best practice usually means having enough cash reserves to last a 3-6-month period.
- Extend payables as long as possible. Another way of mitigating shortfalls would be to extend accounts payable for as long as possible. This means paying suppliers on the longest possible terms without paying late fees.
- Boost sales with creative incentives. Coming up with fun ways to drive sales during a recession can not only increase profit through greater sales volume but may also improve reputation and customer relations if done correctly.
- Cost cutting- eliminating unnecessary spending e.g. regular employee’s entertainment.
We recently launched myMoolaBoard. This specialised software allows businesses to have a real time view on the financial health of their business. Use myMoolaBoard Income and Expense adjustments functionality to assess the impact on your current and projected cash flow if you are planning on making new a purchase or increasing operational expenses.
MyMoolaboard produces useful summaries for Sales, Cash Flow, Profit, Accounts Receivable, Accounts Payable and many more.