With recession looming, 4 ways to act now
The COVID-19 pandemic is roiling financial markets, threatening businesses and challenging management teams. In these uncertain times and with a possible recession looming, the cash and liquidity needs of a business are paramount. Focus on these four areas now to position your business for what’s coming next.
1. Cash is king - understand your cash and working capital needs
Cash is the lifeblood of any business. In a volatile and slowing economy, getting an immediate handle on your daily cash needs is essential. Take a critical view of operations, review existing cash flow forecasting processes and understand how potential disruptions to operations may affect liquidity.
- Run scenario analyses on your financial and cash forecast and understand how that interacts with short-term liquidity needs. This exercise may also highlight any borrowing base or covenant beaches that you could be facing and can help shape any short-term management decisions.
- Look for opportunities to build a war chest of cash and investigate whether drawing down on credit facilities could be prudent for safeguarding your business.
- Strategically manage working capital, potentially selling inventory or minimizing new inventory purchases to generate cash. Take a critical look at working capital KPIs such as days payable outstanding and days sales outstanding and understand impact of stretching these days in either direction. Assess capital expenditure requirements and defer non-essential spending if possible.
2. Cost optimization - be relentless on cost control
Maintaining your current or historical levels of profitability in an environment where supply and demand fundamentals are decreasing simultaneously can be difficult without closely analyzing spending.
- Develop a strategy: do not execute cost-cutting initiatives at the risk of compromising revenue generating capabilities or diminishing value.
- Review fixed and variable costs carefully and determine what costs you actually need to run the business.
- Develop and monitor cost reduction initiatives, such as rationalizing SG&A, taking a close look at headcount and instituting policies that encourage and reward cost savings and conservation.
3. Evaluate customers and suppliers
In times of economic uncertainty, businesses could see increased pressure on the purchasing power and credit-worthiness of customers while also facing tighter credit terms and product availability from suppliers.
- Do not assume your customers are financially healthy. Re-evaluate credit terms with current customers, negotiate the shortest reasonable terms, and carefully review the credit-worthiness of each new customer before extending credit.
- Continuously monitor accounts. Failing to collect receivables timely (or even on an accelerated basis) may result in a cash flow shortfall that could have an immediate impact on all areas of your business.
- Negotiate for the most favorable credit terms with suppliers and critically evaluate your supplier base to determine if your current agreement is still the most favorable for your business.
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