How to maintain cash flow in an economic downturn

As many businesses learnt during the pandemic – in an uncertain economic environment maintaining cash flow is critical to ensuring a business remains resilience and robust. This article outlines how to maintain cash flow in an economic downturn.

With high-level inflation, low-level growth, and no short-term resolution to the Russia – Ukraine crisis apparent, economic uncertainty is increasing. There are now serious concerns several G7 economies are heading for recession. Businesses need to ensure they are the best possible position to weather the economic storm and be in the best position to exploit growth opportunities when markets recover. Whilst liquidity is not the only consideration when building resilience – as unless a business is financially viable – most pockets will eventually run dry – it will provide a solid buffer whilst other resilience strategies can be brought into play. Below are the three considerations to help your business maintain cash flow in an economic downturn.

Own Your Cash Position

Critical to maintaining liquidity will be ensuring cash flow is a corporate priority. In a downturn it is important that organisations own their cash position. This means establishing clear targets, developing business wide strategies to achieve them, and then ensuring regular reviews of the current cash position versus target to maintain focus.

Cashflow affects and is affected by every element of the business from marketing to sales, operations, and finance. In an economic downturn all these areas will need to make strategic adjustments to help ensure resilience.  Maximising the return on every financial investment will be critical to help maintain cash flow, whether it be optimising the efficiency and effectiveness of marketing spend, production or your financial services team. 

Revisit your payables strategy

If cashflow is tight when are where you spend it is key. Developing clear strategic guidelines such as eliminating early payments, prioritizing key suppliers, actively seeking and exploiting offers of extended payment terms / payment holidays can all help ease the pressure in the short-term.

Optimise your credit management

A downturn is the time for proactive and agile credit management. It is critical to communicate with your customers so you can understand their financial position and any potential risk for your business.  In an ideal world you want to touch your customers before they can default and keep cash moving by ensuring your invoice has been received, reconciled and is on the payment run. This will take both time and resource – which needs to be built into your cash management plan.

It is critical to remember this all needs to be done when everyone else will also be looking to optimise their cash flow and therefore delay paying when possible.  This is when it is important to remember the old credit-control adage that ‘he who shouts loudest gets paid first’. Proactive credit-control and debt collection will be critical to maintain cash flow.

If your inhouse team is already working at full capacity this could be the time to look at an outsourced solution to provide flexible and scalable support. Results-driven, they can usually be working your ledgers within days rather than the weeks or months it takes to train and recruit staff. For credit control the costs are often significantly lower than increasing inhouse headcount, whilst for debt collection they usually work on a contingency only basis. 

Conclusion

It is impossible to see into the future and predict every potential crisis, but whilst we don’t know exactly what challenges await, we do have an understanding of their potential impact on our business and can therefore plan to mitigate them. Through reviewing our historic challenges, both in market downturns and everyday business, we can understand and address our areas of weakness and ensure we have placed our business in the most robust position possible. With a strong cash management framework in place, the business should be in a strong position to address any unforeseen issues swiftly and effectively and ensure the financial survival of the business in any economic climate.

Author: Mark Smith

Director of outsourced credit management solutions providers Barratt Smith and Brown and 4D Contact, and a major share-holder in fintech company Invevo, Mark has over 30 years of experience providing clients build strategic process solutions to mitigate challenging financial markets.  

If you have a challenge within your credit and collections process and would like to discuss how 4D Contact outsourced credit management solutions could help, please click here to request a call back.

Contact us now at sales@4dcontact.com or on 020 37691487 for a no-obligation quote.