Given the current economic crisis, many businesses could be desperately seeking new sources of revenues to support their cash flow needs and overall operations.
However, this is not necessarily the right moment to kick off new projects or to launch new products. The situation rather calls for actions that will solidify the financial position of the businesses to sustain and secure its future.
A starting point is looking at your gross margins. Given their variable nature, it is important for you to clearly identify the margins earned with each line of business or customer. Such information will enable a decision-making process of what products, services, categories, customers or markets are more profitable in order to capitalize on them and perhaps exit others where you are losing money.
Understanding your margins by line of business or customer is paramount, considering the fact that the new circumstances created by the pandemic and the resulting economic crisis have dramatically altered the cost of inputs, and customers that were profitable earlier this year might no longer be profitable.
While assessing margins, your businesses should also avoid a common mistake: assuming revenue projections that are too aggressive. At this moment, it is better to stay on the conservative side and manage fixed expenses accordingly.
Eliminate unnecessary expenses, convert fixed costs into variable costs, renegotiate lease agreements and if possible, reduce the need of spaces for a physical operation by fully embracing remote work strategies.
Reviewing and updating collection and payments policies of your business could also help solidify its financial position. Such updated policies should take into consideration each customer profile, their individual financial situation and sector specific practices.
Striking a balance between allowing a reasonable amount of customer debt to accumulate and the industry’s competitive practices is a necessary, but tricky endeavor.
Keep in mind that your customers are the main source of revenue for your business, and the current situation calls for flexibility and a touch of sensibility. This does not mean that you have to ignore red flags.
Commercial relations with clients that have a compromised cash flow situation and that are in a high risk of default should be reconsidered before they can affect your business.
Another action that will help companies improve cash flow is a thorough evaluation of inventory levels and turns in light of the current production cycles needed for today’s demand. Do not spend more than necessary on inventory and review the forecast for product or service demand in light of the new economic circumstances.
Negotiate payment terms with suppliers that more closely resemble your collection terms and use credit lines strategically to protect the cash flow available to operate.
These actions should be combined with other strategies, such as refinancing existing debt, deferring tax payments and taking advantage of business protection programs promoted by public and private institutions, to solidify the financial position of your business.