Along with increasing your income, financial business resilience also involves managing your expenses, improving efficiencies, and making strategic financial decisions.
Build short-term cash reserves
There are numerous ways you can free up cash within your business in order to save some for an emergency. There could be machinery you no longer need or vehicles that 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:
- Negotiating better terms with suppliers, such as longer payment terms or discounts for volume purchases. This reduces your cash tied up in supply and inventory.
- Liquidating excess inventory or raw materials that are not needed and likely won’t otherwise be sold so they can be offered at a discount to free up cash.
- Re-investing your own capital into vital areas of the business allows you to grow without incurring any additional debt.
- Refinancing against your existing assets can provide you with money, but it may require a solid credit history.
- Finding external investors, such as angel investors, venture capitalists, or crowd funders.
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.
Strengthen the foundations
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 multiple customers or market segments to sell to, so that if one experiences a market shift you can rely on others until the market becomes stable again.
- Diversifying into new growth markets as even in times of crisis some businesses will thrive.
- Widening your product or service mix so you do not rely on the whims of the market regarding one product or service.
- Amending your terms of trade to collect money faster by tightening your payment terms, being quick to follow up on late payments, and running credit checks before offering credit.
- Eliminating any part of your business that doesn’t make a profit or scaling it back until it becomes profitable again.
There will be several key decisions to make your business leaner. While you may have an instinct about what is and isn’t profitable, take a look at the numbers to verify your thoughts. Your data will help you make important decisions to enhance your profitability.
Maintain your margins
A reduction in gross profit is a key warning sign of a deteriorating cash situation. Monitor the factors that can negatively affect your gross profit margin, such as:
- Increases in raw materials or product costs also increase your costs and lower your profits.
- Reductions in profitable sales, which directly affect your profits.
- Discounting by staff, which cuts into your profits, especially if discounting is done too frequently or without a strategy.
- Wastage during production, which means you’re paying too much for materials that aren’t being used.
- A loss of quality, which increases customer returns and undercuts your profitability.
Select two or three key warning signals that matter most to your business and then set up regular monitoring to remedy any decline.
Tighten credit control
An efficient credit control system speeds 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 check all customers.
- Monitoring late payments.
- Setting up a process to follow up with debtors.
- Charging interest on late payments.
- As a last resort, use a debt collection agency or specialist lawyer.
Implementing a robust credit control system will help you maintain healthier cash flow and minimize financial risks to 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 critical 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.