The Importance of Managing Cash Flow Through a Recession
The impending recession means that our business community is about to enter a particularly tough trading period. During recession, pressures on cash flow increase as orders reduce, payment terms are lengthened, and customers often pay late as they seek to shore up their own balance sheets.
A 2022 McKinsey survey of CEOs found that 81 percent of leaders now expect a recession. This highlights the need for B2B companies to prepare to maintain operations and ensure that they can effectively manage their cash flow when recession hits.
In this article, we discuss why it’s important to effectively manage cash flow during a recession, how you can manage your company’s cash flow through recession and how Hydr can help you with your cash flow problems.
Why is managing cash flow vital during a recession?
During recession, as demand for a company’s products or services reduces, most businesses struggle to maintain a healthy cash flow.
Even if you are able to maintain demand, revenues count for nothing when you are not being paid. Your P&L might look healthy on paper, but it’s meaningless if you have little or no money in your company’s bank account. Therefore, a key priority for any company over the next 6 months is going to be managing cash flow byensuring that you are paid on time.
The sad thing about a recession is that it brings out bad behaviour. Under enormous pressure, people will take poor decisions and relationships can sour beyond the point of repair. People will order work when they can’t afford it, or they will do so with the firm intention of not paying for it. To avoid such unpleasantness, whilst uncomfortable, it’s essential that companies take a cold, hard look at their customers and begin to monitor their ability to pay invoices.
There is only one thing worse than not winning a piece of business: it’s winning and delivering it, only to realise that the customer was never in a position to pay for it.
How do you manage cash flow through a recession?
Whilst ways to manage costs and win new business are specific to each sector, when it comes to managing cash flow for B2B organisations, there are some common approaches which are worth bearing in mind.
So, what are the key ways you can ensure healthy cash flow during a recession?
1. Customer credit worthiness
It is vital to ensure that your customers are financially healthy before working with them to ensure they have the means to pay for your services. By providing goods or services to a customer, you are extending them a line of credit which is only settled when all invoices have been paid.
There are some great companies that collate data to provide credit scores, and not just for the benefit of insurance companies – anyone can pay a subscription to access the data. Monitor your key customers’ credit ratings and if they should start to dip, pay attention; it’s an early warning sign that not all might be well and their ability to pay your invoices could be reducing.
2. Use the data available at Companies House
We have a fantastic digital resource in Companies House showing a great deal of information about a customer, from latest director changes to accounts filings. If a customer is behind on paperwork, or there are some surprising changes of directors or significant shareholders, these could be signs that not all is well.
3. Consider purchasing credit insurance when you issue invoices
Purchasing credit insurance mitigates risk, particularly when you are issuing larger invoices that are going to have the most significant positive (or negative, if unpaid) impact on your cash flow. Beware though – as the cost of credit insurance for that customer increases, it’s a sign that your customer might be becoming less creditworthy, which could be a risk to your cash flow.
4. Consider invoice finance to maintain healthy cash flow
Invoice finance is a powerful tool to optimise cash flow. If you find a good invoice finance provider, not only will you get paid a significant amount of the value of that invoice within a matter of days, some providers will also manage the collections process, saving you a great deal of time and effort.
5. Keep talking to your customers
Finally – and most importantly – keep talking to your customers. You know them better than anyone and by working together, you and your customers will hopefully get through the rough patches. But do remain dispassionate – your first responsibility is the health of your company’s cash flow, so don’t ignore what the data is telling you, no matter how persuasive your customers may seem.
As you can see, managing your cash flow during a recession is vital to ensure your organisation can survive and hopefully thrive during tough times. As highlighted, there are numerous ways to ensure that you can maintain healthy cash flow such as checking customer creditworthinessand using invoice finance.
At Hydr, we fund 100% of the invoice value for a fee that is fairly priced and, above all, fixed. We also manage the collections process on your behalf too, saving you valuable time and energy. We have stripped invoice finance back to its roots by offering a straightforward and transparent proposition which is supported by great customer service. Not only that, but we have achieved this using the latest digital tools to give funding decisions in real time, while creating a paperless user experience.