I have deliberately been quiet on the recession recently but it is time to get back to focusing on the essentials so that you survive the recession - and that means putting cash flow as your number one priority.
Saturday I listened to American entrepreneur Bill Bartmann's tips on how to survive the recession and today I have read a guide from accountants Leonard Curtis about how long the recession will last and what owner managers should do about it.
The key message in both is that the emphasis has to move from growth to survival and from managing for profit to managing for cash during these tough times.
Those with money in the bank or plenty of unused borrowing facilities have options and can prosper from the opportunities presented by the market changes which arise from competitors running into trouble.
Those businesses which are already close to their borrowing facilities need to face up to their situation and do whatever is necessary to generate cash and breathing space.
Customers will go bust and give you losses.
Other customers will go through severe difficulty and extend the credit they are taking.
Asset prices will continue to reduce as the number of forced sales continue.
So What Can You Do?
First start thinking cash all the time. Factor it into your decisions and learn how to prepare cash flow forecasts so you can see your expected troughs - e.g. rent payment quarters, quarterly VAT payments.
Second, speed up your invoicing and collection processes.
There is no excuse for not invoicing promptly. The sooner the invoice is sent, the sooner it enters your customer's accounting system.
Secondly, put much more emphasis on credit control. Review your policies for:
- Following up big invoices to make sure they are received and authorised so that you make your customers recognise your expectations that the payment will be made promptly.
- Chasing overdue debts - emails, letters and phone calls
- Taking legal action
- Suspending supplies or, in custom-made businesses, starting work
- Assessing credit limits for both new customers and existing customers
Your objective is to be firm but fair - fair to your business, fair to your family who rely on income from the business, fair to your employees and fair to your suppliers. All will suffer if you allow customer problems to become your problems.
Beware of New Customers
Company A has been established for years but it has always been a marginal performer. It finds life increasingly difficult and whilst it has always bought from Competitor B, it starts touting its business around the market.
You see this as an opportunity so you quote normal terms and competitive prices, just a little more than it pays Competitor B.
But cash flow pressures means that it can't pay Competitor B who suspends supplies.
Company A then calls you, blames Competitor B for poor service and implies that Competitor B has made cutbacks and looks to be in trouble.
It wants to switch all its purchases to you and because Competitor B's service problems Company A's stock levels are much lower than normal so it wants to start with a particularly big order if you can give a special introductory discount.
- Grab company A's business with glee and slash prices to make sure you win it.
- Thank company A for its interest but you can't supply the big order in one go and you either want cash upfront or you will let them have 20% on credit which they must pay for before you deliver the next 20%.
The temptation is to jump at option 1 but you risk far more than you gain.
Supply the large order on normal terms, and company A goes into liquidation six weeks later, you may find that you have lost everything.
The profit stream you thought you saw was an illusion and you have lost the cost price of all the product you supplied and gained a big management headache.
This one transaction could be enough to move the recession from difficult to very difficult, or from very difficult to impossible.
It doesn't take much to knock a company that is teetering on the edge over it so remember - think cash in everything you do and make sure that your staff recognise this new priority as well.
If You Have Cash Flow Problems
I may be able to help.
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