These are trying times for cash managers. Sky-high inflation, rising labor costs, and unpredictable expenses caused by supply chain disruptions have made it harder to manage and forecast cash flow.
The growing possibility of an economic downturn is raising the stakes for cash managers.
An economic downturn can have a big impact on cash flow.
Soft demand for goods and services can make it harder for businesses to pay their bills.
It will fall onto the shoulders of the cash manager to help guide the business through the cash crunch.
This article provides cash managers with strategies for protecting cash flow during turbulent times.
Why is cash flow management important?
Every business needs a clear picture of its financial health. Seventy-seven percent of CFOs surveyed by Deloitte say that cash flow forecasting is a critical capability for their finance organization.
Left unchecked, a negative cash flow – with more cash going out than coming in – could spell big trouble. Business leaders are counting on cash managers to help track and forecast the cash coming in and out of the business. Here are some of the reasons that cash flow management is important:
- Planning. Things come at decision makers a million miles an hour in an uncertain economy. By monitoring cash flow, businesses can plan their finances better and make better informed decisions on things like expenses and investments. If a business is facing a cash flow deficit, a cash manager can alert stakeholders to reduce expenses or seek financing to bridge the gap.
- Liquidity management. If a business is unable to generate enough cash to pay its bills, it may be forced to rely on costly borrowing or loans. By monitoring cash flow, a key liquidity measure, cash managers can know whether the business can meet its financial obligations.
- Investment decisions. Most investors look for businesses with a strong, positive cash flow. By optimizing its cash flow, a business can demonstrate that it is generating enough cash to cover its expenses, fund growth opportunities, and pay dividends to its shareholders.
- Lending. Obtaining financing or credit can be hard during a recession. Finance companies prefer to lend money to borrowers who can demonstrate a consistent and reliable source of income. Now is the time to ensure that financing or credit will be there when you need it. Tightly managing your cash flow helps show lenders and creditors that you are creditworthy.
These are some of the reasons that cash flow management is critical in uncertain economic times.
How does a recession impact cash flow?
A slowdown in business activity can have an impact on cash flow in several ways.
- Reduced sales. Most businesses and individuals tighten their belts during a recession. With less cash coming in, businesses may have a hard time covering their expenses.
- Tight credit. Lenders are less willing to lend money during a recession. Difficulty obtaining credit can make it difficult for businesses to access the funds they need to cover expenses.
- Bad debt. When economic times get tough, businesses and individuals may struggle to pay their bills. Difficulty collecting receivables can put the squeeze on a company’s cash flow.
- Reduced yield on investments. The income earned from stocks and bonds and other investments is a big source of cash for many businesses. If these investments dry up during a recession, it can be hard for a business to cover their expenses and manage their cash flow.
- Higher expenses. The rising interest rates, high inflation, and supply chain issues that could occur during a recession can drive up a company’s expenses, at a time when its revenues are declining. It will be up to cash managers to help the business maintain a positive cash flow.
It’s no wonder that 53 percent of CFOs surveyed by The Economist Intelligence Unit said they believe that managing cash flow is more important than revenue growth during a recession.
Cash managers will need to develop effective plans to overcome these cash flow challenges.
Cash management strategies during a recession
Effectively managing cash flow during a recession is a daunting task.
But there are seven strategies that cash managers can use to protect cash flow during a recession.
- Analyze your cash flow. Understanding where your cash is coming from and where it’s going is the first step to protecting your cash flow. The insights you uncover will enable you to identify opportunities to reduce costs, optimize operations, and increase revenue.
- Offer discounts for early payment. Offering discounts for early payment of invoices can incentivize customers to pay sooner while accelerating cash flow for the supplier.
- Tighten credit policies. Periodically running credit checks on customers, reducing payment terms, and requiring deposits or partial payments upfront can reduce the risk of bad debit.
- Extend payment terms with suppliers. Negotiating extended payment terms with suppliers can help a business improve its cash flow. Cash managers can help identify potential targets.
- Reduce expenses. Collaborating with stakeholders to review and reduce expenses can help a business conserve cash during a recession. Cash management data can help stakeholders identify opportunities to reduce staff, trim expenses, and renegotiate contracts with suppliers.
- Optimize inventory levels. Many businesses have a lot of money tied up in raw materials and finished goods sitting on shelves. Reducing inventory levels, improving forecasting, and negotiating more favorable terms with suppliers can reduce inventory carrying costs.
- Finance your invoices. Factoring – selling outstanding invoices to a bank or other third-party at a discount – can provide a business with immediate cash to cover expenses.
Seventy-three percent of CFOs say that managing cash flow is a top priority, per The Hackett Group.
These strategies can help cash managers protect their company’s cash flow during a recession.
Conclusion
A recession can be a challenging time for businesses of any size. Protecting cash is one of the most important functions during uncertain economic times. The strategies in this article will help cash managers ensure that their business has the cash its needs to meet its financial obligations.
