In a recession, the most important thing a business can do is take control of its finances, especially when it comes to cash flow.
Take a Hard Look at Your Balance Sheet and Variable Costs
In an economic downturn, all company spending should come under the microscope.
Your business should be reviewing incoming invoices with a fine toothcomb. You need to be looking not only for accuracy of the charges but also questioning the necessity of the cost. Consider changing your company policy to require more than one person to approve large budget items. This can start conversations about necessity and provide another set of eyes to help determine whether a proposed cost fits into your company’s new overall budget.
Travel, meeting and entertainment costs should be the first items on the chopping block.
In the short-term, consider converting some of your business’s fixed costs into variable costs. For example, instead of buying new company cars outright, you might consider enrolling in a fleet transportation program to give you more flexibility with your capital.
If you determine you are unable to pay an invoice or decide to downgrade a service to save on costs, communicate with your vendor. Having conversations early and often can help preserve your existing vendor relationships, which will set you up for success when you’re able to resume more normal spending in the future.
If your business relies on paper invoices, it’s time to look into online payment options and electronic invoicing. For example, here at Gross Mendelsohn, we have an online payment portal to make it easier for our clients to pay outstanding bills.
When it comes to clients who delay or are late to pay invoices, consider having a high-level member of your team make personal phone calls to encourage timely payments.
When taking on new customers in a recession, it’s okay to make sure the customer can actually pay you before you beginning any work. One way to do this is by asking for financial statements or a letter of credit to ensure that a new client can deliver on payments. If the client can’t provide the necessary financial information, it’s okay to pass on the opportunity (which may save your company thousands of dollars in unpaid invoices in the process).
Talk to Your Key People
The best way to get your team on board with new financial limitations is to make them a part of the process. Ask the key members of your business to project what they think the future of your company looks like in the next year. Together, build a budget based on the group’s realistic revenue projections.
This process might force you to acknowledge some tough topics, like needing to reallocate work from part-time or contract employees to underutilized full-time employees or laying off or furloughing members of your team.