Media hype and some genuine areas of our business community have indicated that there may be economic downturn.
It is important to ensure that your business remains liquid and has plenty of cash available to avoid any setbacks.
It is also important to remember that being profitable does not necessarily mean being liquid. A business can fail because of a shortage of cash, even while profitable.
The following solutions will help you free up as much cash as possible during this time.
Accounts receivable days outstanding:
It is important to pay attention to your accounts receivable collections, because as the economy tightens, your clients will try to hold off on payment to improve their own cashflow position. If you find your clients are not paying within your payment terms, talk with them immediately or as soon as payment is due.
Consignment stock
If you run a small business that relies on carrying stock for display purposes, consider the benefits of consignment stock.This is where the stock remains the property of the supplier until it is sold. At the point it is sold, the supplier will issue an invoice for that stock item only. If this sounds advantageous for your business, contact your supplier and discuss this option. You may be able to return all your current stock to free up cash and have the supplier provide stock for display purposes.
Stock on hand and stock turnover
Pay close attention to your stock movements and your stock levels. Don’t purchase extra stock of slow moving items and keep stock at the minimum level to ensure that your cash is not tied up in stock. In a potential economic downturn your sales may fall, so make sure that your stock levels match your expected sales for the coming months.
Budget and cashflow forecast review
Whether or not you traditionally prepare a budget and cashflow forecast for your business, it makes good business sense to conduct this exercise during this time. This will ensure that you have identified any anticipated drop in revenue or rise in costs and the effect that this will have on your cashflow. Even now, our clients are being requested to provide this information by financiers and banks if they want to borrow funds.
Fixed assets
Assess your capital expenditure needs as part of the budget and cashflow forecast process. If you can survive using the same equipment then don’t spend $30,000 on new equipment. Hold on to this cash just in case you need it for working capital. Also, if you have surplus assets consider selling them to earn some more cash.
Honesty and transparency with your bank
The key point to remember here is: don’t help yourself to the bank’s money. If your business has expended your entire overdraft and you need more cash, don’t continue spending or writing out cheques. If you need more, the best approach is to be upfront and honest with your bank manager and explain the situation. Building a positive working relationship with the bank is important.
Loan repayments
Consider approaching your bank manager to discuss suspending your principal repayments for a period of time or reviewing your repayment plan. Suspending your principal repayments will provide additional cash if needed for a certain period of time, whereas reviewing your repayment plan and extending the term of the loan will reduce your regular repayments.
Drawings
The key point to note here is to “tighten the belt”. Reduce the amount of drawings you take out of the business by addressing your own spending habits.
Conserving your working capital is key and having more cash at the bank can upwardly improve working capital. During an economic downturn, whether it is on ‘media hype’ or not: Cash is King.
Contact PwC to discuss how we can assist you to free up more cash for your business or to simply work with you to prepare an updated budget and cashflow forecast at a competitive price.
