Preparing for Fluctuations in Your Small Business During an Uncertain Economy

For any active working individual in society, talking about “the Economy” is a regular subject around the coffee table:  How the oil price keeps on diving, when the interest rate will creep up again, or what the housing prices look like in the coming year.  People engage in these talks because, more often than not, it directly impacts their job security, income, and net worth, and… it’s also just fun to talk about.  While “the Economy” can be a subject of small talk for some, it should be a serious topic for all small business owners.

Although macroeconomic fluctuations may not be directly felt by small business owners, major economic shifts such as the Great Recession during 2007-2009 can be detrimental to even the smallest businesses.  Consumer spending is curbed, funding is tightened, and a vicious cycle of unemployment pans out.  Needless to say, we’ve witnessed numerous companies small and large, new and old, close their books and disappear into history.  Fortunately, many others survived the downturn and are thrived during the bullish market that followed.  What did they do right?

Though there is no one answer to the question, businesses that prepared themselves to swiftly adapt to the changing environment fared the best.  That is, even for small business owners, those who did their homework in performing sensitivity analyses (creating 3-4 business scenarios in the short and mid-term), and maintained a healthy brand equity, rose to the top.

Cash flow doesn't have to be complicated. Indeed, most cash flow problems have common causes. The following are the four factors that are most often at the root of cash flow problems, as well as advice on how to avoid or overcome them.

1. Not Paying Attention to Expenses - Many businesses end up in a cash flow crunch due to unexpected expenses (for example, costly repairs to equipment, replacing malfunctioning technology or a natural disaster) or too much money going out each month (such as ongoing expenses that have quietly crept up to an unsustainable level). Resolving a cash flow crisis requires that business leadership take a renewed, vigorous look at their ongoing cost structure. Every business owner should have a rigorous process in place to track expenses on a monthly basis and project future expenses for the months ahead. A good business accountant can work with you to make sure you have an eye on the overall health of your business cash flow and are better positioned to anticipate challenges as they arise.

2. Uncertainty about Future Cash Flow - Some businesses are so caught up in the day-to-day grind of getting work done and paying bills that they don’t take time to anticipate what's coming in the next few months. Maintaining healthy cash flow requires a long-term vision. Most accounting experts recommend that every business maintain a six-month cash flow projection with expected revenue and expenses, while also adjusting for any seasonal peaks and valleys.

3. Slow-Paying Customers - Many cash flow problems are caused by a delay in receivables, such as when a company’s customers or clients are slow in paying their bills. Far too many companies allow their customers to become delinquent in paying them, often without fully realizing the problem until it is having a major impact on their cash flow. Business owners need to put consistent policies and procedures in place to ensure that customers pay in a timely fashion. It's especially important to clarify your payment terms and expectations on every invoice, whether that’s “payment due within 30 days” or “payment due upon receipt.” Don’t assume that your customers automatically know what to expect be clear about when you expect to be paid for your products or services.

4. No Plan for Collections - There comes a point when a slow-paying customer turns into a delinquent customer. What then? Many businesses do not have a standard process in place to collect on unpaid bills. It doesn't have to be complicated or time-consuming; it’s often a matter of scheduling collections into the overall sales process and making it part of ongoing daily business operations. Sometimes customers are slow in paying because you haven’t reminded them the money is due. It’s unfortunate that business owners need to remind customers that they owe money, but sometimes that little push is all you need to collect outstanding funds.

More than anything, however, small businesses must be prepared to fuel their business with operating cash flow during these economic downturns.  It is always sound practice to have multiple funding sources and credit lines, even if you are not using them all during the “good times”. By planning at least the worst, average, and best case scenarios for the near future, small business owners can minimize damage from external influences, while maximizing opportunities during upward momentums.  All of these can be best achieved through an efficient and stable cash flow, often supplemented by obtaining small business capital. Ready to learn about your options?