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Managing cash flow and liquidity during an economic downturn

Cash flow and liquidity are important drivers behind a business’s day-to-day operations and its overall contingency plan. For a business owner, this is even more evident during an economic downturn or a pandemic crisis whereby the entire economy is suffering together. There is a sudden decrease in demand, sales plummet and supply chains for many businesses experience disruption. How do you cope?

Each business is unique and faces different challenges. Below are a few general suggestions geared toward business owners on managing liquidity and cash flow during an economic downturn:

Working capital

Analyze your working capital (current assets and liabilities). This includes cash balances, accounts receivables (A/R), inventories, prepaid expenses and any current liabilities such as accounts payables (A/P).

What are your payment terms for your customers? Do you get paid every 30 days, 60 days, or 90 days and over? The faster your get paid (i.e. in the first 30 days) the stronger your liquidity. How can you incentivize your customers to pay you sooner? Perhaps try offering a small discount on early payments or charge the interest on payments over 90 days.

For receivables that take too long to pay, consider implementing an A/R factoring line. This enables you to be paid a percentage of your A/R (i. e. 90%) upfront and funds can be collected by a third party directly from your clients.

On the A/P side, can you extend payment terms to your suppliers so that instead of paying every 30 days, you pay them every 60 or 90 days? It all depends on volume quantities, existing relationships, and history; however, it is a conversation worth having.

Cut all non-essential costs

Depending on the type of business that you are in, this varies. Can you use internal staff to do some of the tasks that were previously outsourced? Conduct an internal skills assessment – you may be surprised at the hidden talent that you already have on your team. Redeploy staff, supply additional training, and remember that it is important to keep morale high in order to stay productive and with purpose during challenging times.

Monitor your cash balance

Stay up to date with cash balances, online or using an app from your bank or credit union. Should you need immediate financial assistance, you want to make sure that your financial partners can get this information in a timely fashion.

Operating lines of credit

Do you have any in place? If so, how much room do you have? Can you ask for a greater limit, at least temporarily from your bank/credit union? Keep communication open with your financial partners. They want to be there for you; however, it is important that everyone works with honesty and integrity. Work together on projections so that they can tailor solutions to your specific needs.

Payment deferrals

Negotiate or ask for a temporary payment deferral on your loans.

High margin products/services

Focus on higher-margin products and/or services so that your business is better optimized and converts resources to higher revenues and in turn cash.

Analyze your supply chain management cycle

Can you negotiate better terms, including quality, volumes, payment?

Optimization in manufacturing capacity

If you are in manufacturing, try to figure out how to optimize space. Can you move to a smaller location with minimal business disruption and save on rent? Or try sub-leasing (if permitted) some unutilized space in your factory for additional cash inflows.

Think lean

Simplify your organizational structure and processes to achieve optimal efficiencies.

Alternative financing

Subordinated debt, a mezzanine loan, convertible debt or perhaps a minority equity injection can boost your company’s growth potential and maintain stronger working capital.

Remain agile

Is your business digitally connected? If not, perhaps this is the time to explore how to go online to capture greater market share and adapt to changing customer preferences.

Use this time to drive brand awareness. Build out strong messaging for your clients and business partners; you want to manage expectations and ease concerns. Focus on building your reputation in the market, showcasing your business values and reaching potential customers. Even if you are unable to currently do business, build a strong pipeline by staying active in the market and being honest and professional in your communications. In time, the market will normalize, and you can continue to serve the customer base you maintained during hardship.

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