How businesses can increase their cash flow in a crisis

How businesses can increase their cash flow in a crisis

Hope comes for countries across the globe looking to ease their lockdown restrictions today, with shops to open across Europe and in certain US states. In Germany, 80% of retail stores are now open in Bavaria, and further funding of $484 billion is today available as part of the Paycheck Protection Programme (PPP) in the US. The encouragement from political leaders has had a direct impact on the global stock market as the FTSE index has increase by 1.7% earlier this week.

In the UK, conversely, there is no such luck as a new survey reveals half of UK SMEs will run out of money in the next 12 weeks; with 7 in 10 having already lost over 50% of their usual revenue. Boris Johnson has now returned to Downing Street an encouraging sign for the British public however the there is still no update from the Government on when lockdown will be lifted, and consequently businesses cannot yet properly plan on when and how they will reopen. Small firms in particular are struggling as the lockdown impacts their ability to trade or continue with business-as-usual.

With this in mind, CEO and Founder of global SME advisors RWT Growth, Reece Tomlinson provides his tips on how SMEs can generate cash flow in these troubling times:

1. Decrease customer payment terms.
If customers are provided credit by the business it can present a plethora of challenges from a cash flow perspective. In such an event, aim to reduce credit provided or reduce the time in which a customer is permitted to pay their invoice. For example, if the customer is provided with 30-day terms to pay an outstanding invoice, either reduce the terms, or offer an early payment incentive, such as 2% off the invoice if it is paid within ten days, in an effort to entice the customer to pay it early and boost incoming cash flow.

2. Lower your costs.
When a business is facing cash flow issues, lowering costs is a key element in turning the situation around. Now, when some firms are experiencing a dip in profits, action needs to be taken to correct the underlying problem. Regardless of the size of the business, discretionary and non-crucial costs can be decreased or cut out entirely. The aim is to cut costs so the company is generating positive cash flow again, without detracting from the core of the business and its ability to provide its goods or services.

Examples of discretionary expenses include: non-immediate ROI (return on investment) purchases, printing, and employee perks. As a guide, businesses should cut expenses that their customers would never see versus those which could impact the customers’ experience. 

3. Delay or revise capital expenditures.
A capital expenditure is generally defined as an expense that benefits the company over a long period of time. Many business find themselves with cash flow problems due to capital expenditures in which they use cash flow from operations or their cash reserves to fund them. Whilst reinvestment back into the business is not a bad thing, the problem can stem from the fact that free cash flow is needed for operations and by using such cash flow to fund major purchases and investments, it reduces the firm’s cash on hand. The simple solution is to either cease such purchases, or rather finance them through other methods such as long-term debt, capital leases or slowing down the rate of investment. Although it may seem counterintuitive, the cost of borrowing for a capital expenditure may be significantly less than the cost of having to deal with continued cash flow problems, as well as the costs associated with issues such as late payment.

Patrick Doherty
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