Strengthen the foundation

Build short-term cash reserves

If you don’t have cash savings, you may be able to free up cash within your business to tide you over. 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:

• Selling parts of the business
• Liquidating excess inventory or raw materials
• Re-investing your own capital
• Refinancing against your existing assets
• Finding external investors.

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.

Review how you operate

Now is the time to make permanent changes to strengthen your business, which are often things you’ve thought of doing but haven’t had the time or didn’t need to do as sales were steady. This includes how your business can operate cost-effectively while improving efficiency. 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 more than a few customers or segments to rely on
• Diversifying into new growth markets (even in times of crisis, some businesses will thrive)
• Widening your product or service mix
• Negotiating new terms with suppliers
• Amending your terms of trade to collect money faster
• Axing any part of your business that doesn’t make a profit 
• Scaling back non-essential staff
• Focusing on core business

There will be a number of key decisions to make your business leaner and meaner, and it’s likely you’ll instinctively know what needs to go and what needs to stay.

Maintain your margins

A reduction in gross profit is a key warning sign that hints at a deteriorating cash situation. Monitor the things that can negatively affect your gross profit margin, such as:

• Increases in raw materials or product costs
• Reduction in profitable sales
• Discounting by staff
• Wastage during production
• A loss of quality which increases customer returns
• Late paying customers

Select the two or three key warning signals that matter to your business and then set up regular monitoring to remedy any decline.

Tighten credit control

An efficient credit control system helps speed 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 checking 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.

Identify future cash flow

Sketch out a number of cash flow scenarios to identify what your business would look like in the future when sales drop (or cease) over a period of time, and develop contingencies in advance. For these scenarios, you could consider the following:

• Costs you will no longer have
• Extra cuts you can make
• The impact on gross profit and margin
• The revenue you need to break even
• The length of time it takes to recover
• Tighter controls over inventory to service customers just in time

Each drop in sales will usually have a corresponding fall in variable costs (materials, cost of goods sold). Still, at some stage, you may find it’s uneconomic to continue with certain products and services if the fixed costs are too high. In these cases, you may have to lower your overall cost base (possibly making staff redundant, moving premises, or closing less profitable product lines).

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 are suddenly unable 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 contacting these businesses as a backup if your existing supplier can’t deliver.

Your future plans

You may be able to pivot your business to find new revenue streams by finding different customers or markets, developing new products or services, or finding new ways to sell to your customers. Outline what you aim to implement to bring your business back to positive cash flow and profitability.