By Kevin Kehoe, Paul Liles, Chris Ebert
High inflation. Rising interest rates. Supply chain disruptions. Over the past three years, businesses of every size across industries have felt the squeeze on profits due to these challenges. Although these issues are starting to resolve, a potential recession has companies asking, “How do we maximize or maintain cash flow in the current economic environment?”
Some companies answered this question by drawing heavily on lines of credit or relying on governmental support programs, such as the Paycheck Protection Program. But with these programs ending and the cost of doing business rising, these solutions are not sustainable for companies seeking healthy, or at least stable, cash flows.
So, what can companies do to shore up the bottom line ahead of and during a potential recession? Here are a few best practices we recommend for managing cash flow.
1. Stay on top of receivables
For many businesses, cash flow is hampered by accounts receivable that have gone stale. A sizable accounts receivable balance may look good on paper, but it doesn’t help you until the cash comes in the door. We suggest looking at your receivables weekly, or even daily, to identify which payments are due soon, which are due now and which are late. Designate a team member to contact customers with overdue bills, reminding them of your payment terms and finding out when you can expect payment.
Invoicing more frequently is another way to keep your receivables fresh. Sending invoices weekly or biweekly rather than once a month helps stagger payment due dates and ensures a steadier monthly income stream. Other tips for managing your receivables include offering payment plans, listing specific payment terms on invoices and adding late payment fees, especially for chronic late payers.
2. Review your customer list and offerings
Speaking of chronic late payers, when was the last time you reviewed your customer list? Customers who consistently pay late or suck up company resources may be more of a drag on your cash flow than you realize. Chasing revenue growth with less credit-worthy customers is likely to do great harm to your bottom line.
It also may be time to look at who you’re targeting as potential customers. Is your ideal customer buying what you’re offering? If not, you might consider repositioning your offer or pursuing a different market.
3. Right-size inventory
Supply chain snarls in 2020 and 2021, followed by shipping rate hikes in 2022, caused many manufacturers and retailers to overbuy inventory, leaving them with too many items on their shelves and in warehouses as demand returned to normal. If your current inventory levels are too heavy and cash flow could use a boost, consider running a sale or special offer to move outdated products and turn them into cash.
4. Actively manage your budget
Companies often take a “set it and forget it” approach to their budgets. But in today’s economic environment, the cost of doing business can shift dramatically and quickly. For example, the cost of shipping from Asia to the U.S. west spiked by 11.7% between May and June 2022.1 Producers and retailers relying on imports suddenly had to pay much more to import goods, compressing margins and throwing off company budgets.
In a swiftly changing economic environment, it’s a best practice to review your income and expenses monthly and adjust the budget to accommodate potential hikes in the cost of goods or forecasted downturns in sales. This is also a good time to take a fresh look at expenses, identifying possible line items that can be reduced to offset increases in other areas. Key costs that may be open for adjustment include fixed overhead, labor and inventory levels.
5. Revisit pricing and margins
Rising costs of goods sold may mean it’s time to raise prices and pass those additional expenses to your customers. Start by identifying the gross profit margin for each item you sell, and use this information to make strategic pricing decisions. Can you increase the margins for certain products or services? Or should you focus solely on offerings with higher margins? Would raising prices on only certain offerings be better, or will you do an across-the-board hike?
6. Utilize working capital strategically
Sometimes it’s not possible to adjust budgets to cover cash shortfalls or unexpected expenses. In those cases, a business loan or line of credit can help bridge the gap to make payroll, pay for materials or inventory, cover rent, etc. Loans and lines of credit can also be used to finance expansion or undertake a new project that current cash flows don’t support.
We recommend working with a lender who can suggest the right working capital options for your company’s needs. When interest rates drop, your banker can also help you pinpoint the right time to draw down credit or pay off outstanding balances to avoid paying too much interest. If you have excess funds, lenders can help guide you through investing those funds in high-yield accounts.
Be sure to set a meeting with your banker to discuss the health of your financials and working capital. A consistent and intentional relationship with your lender can yield opportunities to strengthen cash flow and lead to far better results and solutions in a time of liquidity constraints. Lenders are in the best position to meet your needs when they have been kept abreast of your journey along the way. At CIBC, our experienced team is a trusted partner for business banking across the U.S. To learn more about CIBC Business Banking services, visit our Business Banking page.
1 CNBC, August 2022. U.S. freight shipping rates have likely peaked, according to new Cass Freight Index data, in another sign that inflation is easing Opens in a new window..
