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5 effective tips for cash flow management during an economic downturn

5 effective tips for cash flow management during an economic downturn

Winter is coming.

Is it here yet? What should businesses do if they are to face it? There’s a lot of speculation about the US economy heading into a recession. Inflation makes everything costlier let alone borrowing funds for working capital.

As interest rates grow higher, it is important to consider alternative strategies to carefully slide by an economic downturn that might affect your business. Experts predict that the United States will 'narrowly avoid' a recession in 2022 and 2023, but it's always better to thwart the consequences of such events if they happen.

According to Insider, 82% of businesses fail due to cash flow problems. It happens when a company does not have enough cash reserves for working capital requirements. The financial stability of a business is gauged by how effective its treasury cash management is.

5 cash flow strategies to help you emerge inviolable during turbulent times

1. Analyze your cash flow

Cash flow analysis helps determine the liquidity of your business. There are three types of cash flows: cash flow from investing activities, cash flow from operating activities, and cash flow from financing activities. Cash flow analysis will help you determine the inflow and outflow to make necessary decisions.

Study your recurring overhead expenses and see if you can cut down on them for a while. Trim down on less important purchases like stocking up stationeries, additional perks, marketing campaigns, hiring freeze, etc. Also, look out for professional business services like outsourced human resources and legal services.

Over-purchasing of inventory stands as the biggest problem in such testing times. So it's good to avoid it. Analyzing which areas of your business are least profitable can help you adjust your business plan and strategy accordingly.

2. Expedite your receivables

Any cash flow crisis playbook will tell you that the faster money comes in, the faster your cash flow problems will be solved. Receivables are the least tapped source of cash inflow. Having an automated AR process can help not just speed up the collections process but also helps in crafting efficient AR strategies. A decrease in AR is basically more cash inflow and this eventually adds up to net earnings.

Growfin helps you collect better through collaboration and real-time AR tracking that can help bring down your DSO and bad debts. Here are a few other things you can do:

  • Ask your new customers for part payments for services delivered than asking for one-time payments through a single invoice.
  • Send out invoices early by taking proactive measures. Sort your customers into aging buckets and prioritize follow-ups.
  • Search for past-due clients for your receivables. Send out personalized reminders or call them to follow up, especially if they are high-value customers.
  • Encourage early payments by offering incentives and offer multiple payment options for your clients for payments.

3. Lease or rent instead of buying

Purchasing new equipment during an economic downturn is not a wise decision. During a recession, businesses are constantly experimenting in order to sustain and stay cash flow positive. Renting or leasing will allow you to upgrade or downgrade your equipment as needed. So it becomes easier to try out strategic initiatives like new business models, diversification plans, geographic expansions, etc without creating a dent in the organization’s budget.

Leases are also eligible for tax credits. Furthermore, selling non-essential assets is an excellent way to increase cash inflow. When your hands are tied, it is a quick way to raise funds.

4. Negotiate Payables

One other way to maintain a positive cash flow is by reducing the amount of money that goes out from your business. Trying to reduce your outflow during recessions can help ease the strain on your business and the working capital. Payables are one section that you can try to work on for this. Negotiate with your vendors to see if you can delay the payments for a while or can mediate on part payments. While the chances are they may not budge, remember that vendors to whom you are loyal would be willing to enable flexible payments.

5. Switch from spreadsheets to software

Gone are the days when you have to use countless spreadsheets for cash flow analysis. Working with traditional tools can slow down your efficiency in being able to make the right cash flow forecasts. When scaling becomes tougher as you grow, you will understand that an automated system offers a more streamlined solution. While traditional tools help you find what you are looking for, it does matter how much time it takes to get it done.

For instance, using spreadsheets for forecasting can cause problems like misplacement of data, loss of data, and incorrect entries that can lead to inaccurate results and thus demean the purpose of forecasting. Faulty forecasts are just as good as not creating or analyzing your books for forecasting reports.

And for that, you need a solution that you can rely on and that helps you aid in this process. Collecting can become a daunting task, especially during an economic downturn as customers find it hard to pay. In times when you cannot afford to add more people to your collections team, a tool like Growfin can help. An AR automation tool can also give you positive ROI in the form of working capital savings and increased productivity!

As the calls from Wall Street grow louder, businesses are preparing themselves to be agile and nimble by trying to achieve more with less. It’s time for better strategies and better cash flows!

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