Strengthening Your Cash Foundation

Why you need cash reserves

Businesses often encounter unexpected expenses such as equipment breakdowns, sudden market changes, or urgent repairs. Having sufficient cash reserves allows you to handle these situations and live to fight another day.

Other reasons include:

• Sudden economic downturns or unforeseen crises.
• Being able to invest in growth opportunities, such as expanding into new markets or acquiring other businesses.
• Fund research and development projects without worrying about cash flow.
• Being able to stick to your pricing or avoid discounting, as you’re not relying on immediate sales.
• Maintaining good relationships with suppliers and service providers by paying on time, potentially leading to better deals and services.

A healthy cash position will also help your business to offer competitive salaries and benefits, attracting and retaining top talent.

Building short-term cash reserves

If you don’t have cash savings, you may be able to free up funds within your business to tide you over. There could be machinery you no longer need, or vehicles which could be sold and turned into cash. These could then be leased back when you need them.

Other ways to raise extra working capital include:

• Selling parts of the business that contribute the least to profit.
• Liquidating excess inventory or raw materials.
• Re-investing your own capital.
• Refinancing against your existing assets.
• Finding external investors.

Look closely at the business assets on your balance sheet to see what you don’t need and consider what you can convert into cash without impacting your core business.

Review how you operate

Now is the time to make permanent changes to strengthen your business, which are often things you’ve thought of doing but haven’t had the time, or didn’t need to do as sales were steady. This includes how your business can operate more cost effectively while maintaining or improving efficiency.

Take time to document every step of your business process to improve your capacity to do more with less. Other ways to be more resilient include:

• Having more than a few customers or segments to rely on.
• Diversifying into new growth markets. Even in times of crisis some businesses will thrive.
• Widening your product or service mix.
• Negotiating new terms with suppliers.
• Amending your terms of trade to collect money faster.
• Axing any part of your business that doesn’t make a profit.
• Scaling back non-essential staff.
• Focusing on core business.

There will be several key decisions to make your business leaner and meaner and it’s likely you’ll instinctively know what needs to go and what needs to stay.

Maintain your margins

A reduction in gross profit is a key warning sign that hints at a deteriorating cash situation. Monitor the things that can negatively affect your gross profit margin such as:

• Increases in raw materials or product costs.
• Reduction in profitable sales.
• Discounting by staff.
• Wastage during production.
• A loss of quality which increases customer returns.
• Late paying customers.

Select the two or three key warning signals that matter to your business and then set up regular monitoring to remedy any decline.

Tighten credit control

An efficient credit control system helps speed up your cash collection and reduces bad debt by limiting how much credit you provide to customers. You could consider collection options such as:

• Requesting deposits or progress payments.
• Using credit scoring systems and setting appropriate credit limits.
• Credit checking all customers.
• Monitoring late payments.
• Setting up a process to follow up with debtors.
• Charging interest on late payments.
• As a last resort, using a debt collection agency or collection attorney.

When you implement a robust credit control strategy, you can significantly reduce financial risk and make sure that cash flow remains steady, supporting the overall stability and growth of your business.

Protect your supply chain

It won’t only be your business that’s impacted by a crisis. Outline what may happen to your key suppliers and identify risks to your business if they were suddenly no longer able to deliver. This is especially important if you have exclusive or hard-to-replace materials or products as part of your own delivery to customers.

Develop an alternate supplier plan and consider reaching out to these businesses as back-up if your existing supplier can’t deliver.

Future plans

You may be able to move your business to find new revenue streams through different customers or markets, new business models, or finding new ways to sell to your customers. Outline what you aim to implement to bring your business back to positive cash flow and then profitability.

Next steps

• Sketch out a few cash flow scenarios to identify what your business would look like in the future where sales drop, or cease, over a period and develop contingencies in advance.
• For these scenarios you could consider costs you will no longer have, extra cuts you can make, the revenue you need to break even and the time it takes to recover from an external event.
• Regularly review and update your financial plans, including cash reserves and credit policies, so that your business is prepared for unexpected disruptions.
• Strengthen relationships with key suppliers and customers to build a more resilient network that can help weather economic challenges.

At some stage you may find it’s uneconomic to continue with certain products and services if the fixed costs are too high. In these cases, you may have to lower your overall cost base, possibly making staff redundant, move premises, or close less profitable product lines.

*These resources are guides only and should neither replace competent advice, nor be taken or relied upon as financial or professional advice.