Managing finances in an economic downturn
In most cases, businesses exposed to the impacts of an economic downturn will first experience changes in their trading activity, which will affect their sales figures and revenue. This may be partly because of lower consumer confidence due to restricted access to consumer credit, and job instability including higher unemployment. In turn, this decline in revenue will impact on the financial position of the business in a number of ways, including profitability and cash flow.
The following strategies will help you manage your business's finances during an economic downturn by strengthening your financial position, and ensuring your business is ready and able to embrace opportunities.
Monitoring your business
Continually monitor the economic environment and understand how any changes may affect you. This will give you the information you need to plan whether to address financial risks and seize certain opportunities.
Make sure you have up-to-date financial information about your business. An annual profit budget forecast shows the expected income, expenditure and profit for a business over a budget period. It tells how much profit is likely from an expected level of trading. It may also show you ways that you can restructure how you manage your debts to free up some cash.
Managing cash flow
Managing your cash flow helps keep your business financially stable. A profitable business can still fail because of a shortage of cash, so managing your cash is important.
Managing your cash flow includes:
- managing your debtors and creditors to make sure your business has enough cash to pay bills, wages, taxes and other expenses
- assessing your receivables, inventory, business expenses and available working capital
- reviewing your accounts payable and business expenditure — considering what can be reduced, rationalised or even cancelled. This includes your day to day costs such as rent, telephone use, energy consumption and transport expenses
- negotiating with your suppliers to get a better price and better credit terms
- considering shortening the time frame between customers ordering and paying
- sending invoices quickly and offering discounts for early payment. Asking for work-in-progress instalments
- establishing a good relationship with your financial institution
- reviewing your business processes and overheads. Money spent making your business more efficient will make it more competitive and more resilient
- investigating ways to get more out of your assets, such as by renting any unused space or equipment.
When stock is well managed, profit improves. Successful stock management requires a balance between the costs and the benefits of the stock. The costs include the money tied up in stock as well as storage and insurance. The benefits include having adequate stock on hand to meet client demand.
Good stock management is knowing what stock to buy, when to buy it and how much to buy. This has a direct impact on your cash-flow management and profitability.
Pricing products and services
Setting the right price for your products or services helps you maximise profits while maintaining a good relationship with your customers. Effective pricing can help you avoid the serious financial problems that may occur if your prices are too high or low.