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Darren Wingfield

Darren Wingfield

Commercial Manager

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Getting Cash Flow Management Right During a Recession

Posted on 07/11/22  |  3 Minutes

Good cash flow management is an important part of successful business operations. But during times of recession, it’s imperative to have a good handle on your business finances in order to ride the changing tides.

But there’s no need to panic. To help you prepare your business for the tough economic climate ahead, we’ve put together some tips on how to maintain a healthy cash flow even during a recession.

Understand how a recession can affect your business

With the current UK economy, business owners face bigger challenges than ever before as they struggle to navigate uncertain times - and small businesses are particularly vulnerable.

Understanding the different forms of impact a recession can have on your small business is just one way to prepare your business and better manage your cash flow.

Some of the most common forms of impact include:

  • Drop-off in sales
  • Reduction in order quantities or switching to cheaper product lines
  • Slower invoice payments
  • More time spent chasing outstanding invoices
  • Business closures that can impact your supply chain (and your cash flow if they owe you money)

Now you know how your business may be affected, it’s time to start putting cash flow management best practices in place with the following tips.

  1. Keep on top of your invoicing

During a recession, many companies will suffer from cash flow issues - meaning payments can be subject to delays.

Keeping track of your incoming revenue - or receivables - is a crucial part of managing your cash flow effectively. This means making sure you’re promptly invoicing clients and receiving those payments in good time, which involves regularly reviewing your outstanding invoices list.

While there’s no guarantee a client will pay you right away, you’re at least giving yourself the best possible chance to get payments through quickly.

Manually issuing, checking and chasing invoices can be a time-consuming process but, with some cloud accounting software, much of this can be automated to accelerate the process.

  1. Update your payment terms

Sending out your invoices on time is just part of the process of getting payments through on time.

During times of recession, you should also review and update your payment terms, ensuring customers know when invoices for your products or services need to be paid. This will help you to better manage your cash flow and forecasting.

Payment terms vary and it’s recommended to make these shorter (between 14 and 30 days) during a recession. Alternatively, you may choose to implement a cash on delivery system.

When it comes to informing customers of your payment terms, make sure they are clearly outlined on invoices - along with payment methods. If you’re updating any of your payment terms, be sure to inform customers in advance.

You can incentivise people to pay on time or even early with early payment discounts and late payment interest. For instance, customers who pay within the first 7 days of their 30-day payment term could receive a 5% discount, while any late payments could incur 8% interest for each day the invoice is overdue.

  1. Create a cash flow forecast

Prompt invoice and robust payment terms can aid short-term cash flow management, but it’s essential to also have an eye on the longer term.

This is where creating a cash flow forecast comes in. This will give you a high-level view of the cash flowing in and out of the company over a longer period of time, typically 12-18 months.

Your forecast should detail all income from sales, bank interest and any other sources - as well as all outgoing expenses, such as wages, product and raw material procurement, rent and utility bills.

In order for your cash flow forecast to be useful, you need to be realistic with your figures. That way, you’ll have an informed view of your business’s cash flow health, which can help you to highlight potential financial shortfalls in advance.

  1. Review your profit margins

Every business should look to maximise their profit margins, but this can easily be neglected when things are going well. Amidst financial difficulties, it pays to make sure every avenue for exploiting profit is explored.

This means reviewing your profit margins. Are you squeezing every penny out of your top-selling products? Is there room to improve on logistics to maximise profits. 

There may not be further optimisations you can make in these areas, but it’s always worth checking your profit margins to see if there are even small improvements to be made.

For instance, could you negotiate a lower price with suppliers if you bulk-buy more of your top-selling products? Perhaps there’s room to implement a slight price increase to claw back some profit across your product range? Or maybe you can streamline your shipping process, or switch shipping partners altogether? You may even identify products with bigger profit margins that you weren’t aware of, giving you a new focus for promotions.

Whatever improvements you make to your product lines and processes to reduce overhead costs and increase profit margins, the result will be improved company cash flow.

  1. Hire an accountant for support

For small businesses, negotiating your way through a recession can feel like a daunting process - but you don’t have to go through it alone.

Enlisting the services of a professional accountant is one of the best ways to make sure you maintain a healthy cash flow during a recession.

While many business owners may see this as yet another expense they can’t afford, having an accountant is usually money well spent, as they can help you keep a close eye on your cash flow while offering advice on other areas of accounting.

More importantly, an accountant will make sure your company is compliant with the latest financial laws, ensure you’re paying the correct amount of tax, and identify applicable tax reliefs and grants you may be entitled to.

Economic uncertainty is understandably unsettling for small businesses but, by adopting the above cash flow management tips and best practices, you can help to stabilise your business’s cash flow.

For a little help along the way, get in touch with the Harlands team today. Using our accountancy skills and expertise, we can help you face the future head-on by getting your business financials in order.