How to improve your business's cash flow during a recession

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    Credit control & accounts receivables

    How to improve your business's cash flow during a recession

    With the Bank of England announcing that it expects the UK will fall into recession this year, businesses up and down the country are preparing for the worst.

    During an economic downturn, it is more important than ever for businesses to ensure they have a healthy cash flow. 

    In this article, we will give you some tips on how to improve your business's cash flow during these difficult times.

    What do we mean by a recession?


    A recession is an economic downturn that lasts for at least six months.
    In the past, recessions have been caused by a variety of factors, including high interest rates, stock market crashes, oil price shocks and bank failures.

    During a recession, consumers tend to spend less money, and businesses find it harder to get credit.

    This can lead to a decrease in demand for goods and services, which can cause businesses to lay off workers or even go out of business.

    The last recession experienced by the UK was in 2008/09, which lasted for 18 months and was caused by the global financial crisis.

    The current threatened recession is being driven by a range of factors, including the US-China trade war, the Ukraine conflict, Brexit uncertainty, the Pandemic, and slowing global growth.


    What effects does a recession have on businesses?


    During a recession, businesses may find that their cash flow dries up. This is because customers are spending less money and may be slow to pay invoices.

    As a result of this, businesses may find it difficult to meet their financial obligations, such as paying their employees or suppliers. This can lead to layoffs, reduced hours, and even business closures.

    While the outcome of a recession can be very damaging for businesses, there are things that can be done to minimise the impact and even help improve cash flow during this time.


    Why is cash flow so important?


    During a recession, it is even more important for businesses to keep a close eye on their cash flow.

    This is because businesses may find it difficult to obtain credit from banks or other financial institutions.

    As a result, businesses need to be extra careful about how they spend their money and make sure that they are collecting all the money that is owed to them.

    The primary issue is that the looming recession isn't the only threat to the cash flow of business in the UK.

    The UK is also in the grip of a late payment crisis, with businesses owed billions of pounds in late invoices.

    According to research by the FSB Small Business Index (SBI), the UK's late payment problem has worsened over the past year, and it predicts that as many as 440,000 businesses could be forced to close in 2022 due to late payments alone.

    Around 26 per cent of small businesses are waiting longer for invoices to be paid, and the average outstanding debt has risen to £36,000 per business.

    Now only that, but the situation is expected to grow worse as the economic downturn continues to bite, representing one of the biggest threats to growth and survival for small businesses in the UK.

    The impact that late payments have on a business's cash flow is significant, and can often be the difference between success and failure.

    So what can businesses do to protect themselves from late payments and improve their cash flow during a recession?


    What are some ways to improve cash flow during a recession?


    There are a number of things businesses can do to improve their cash flow during a recession. To help out, we've listed five of the most effective methods below:


    1. Review and reduce costs

    During any economic downturn, one of the first things any business should do is try to reduce its costs where possible.

    This might mean some hard decisions have to be made. But it's important to remember that cash flow is king during a recession, and every little saving can make a big difference.

    Cost-cutting methods can involve anything from renegotiating leases and supplier contracts, to cutting back on non-essential expenditures.

    Currently, the UK is also experiencing a rapid rise in the cost of utilities, so businesses should also be looking at ways to reduce their energy consumption where possible.

    Thankfully, one of the side effects of the pandemic is that people are now more accustomed to working at home, so there may be scope to reduce your office space and associated costs.

    By reducing your costs, you'll free up more cash that can be used to improve your business's cash flow and help you weather the storm during a recession.


    2. Renegotiate your outgoings

    Another step you can take to reinforce your cash flow is to renegotiate your outgoings with suppliers.

    This could involve anything from asking for a discount on invoices to extending the payment terms.

    For example, if you usually pay your invoices within 30 days, see if you can extend this to 45 or 60 days. This will give you more time to generate the income needed to pay the invoices.

    Since interest rates are on the rise, it may also be worth renegotiating any lines of credit or loans you have.

    You should also consider whether there are any areas where you can reduce your costs.

    For example, could you switch to a cheaper supplier or reduce your inventory levels?

    Since other companies will be looking to retain as many customers as possible, you could also negotiate for better prices or payment terms from your suppliers.

    By taking these steps, you can help to ensure that your business has the cash it needs to weather the storm during a recession.


    3. Optimise your customer invoicing

    One of the most important things you can do to improve your cash flow during a recession is to optimise your customer invoicing.

    This means ensuring that invoices are issued as soon as goods or services are delivered, and that you have a system in place for following up on late payments.

    Timely invoicing is essential for keeping cash flowing into your business, so it's important to make sure that you have a system in place that works for you and your customers.

    You might also want to consider offering discounts for early payment, which can help to encourage customers to pay their invoices promptly.

    On the other hand, you might also want to implement late payment fees for customers who don't pay their invoices on time.

    Both of these options can help to improve your business's cash flow during a recession.

    Another way to improve your cash flow during a recession is to tighten up your credit control. This means being stricter about who you extend credit to, and making sure that you have a system in place for chasing up late payments.

    Having a concrete credit control plan in place can help to ensure that your business is getting paid on time, which can in turn help to improve your cash flow during a recession.


    4. Embrace automation to get paid faster and more reliably

    The unfortunate reality is that most businesses will be caught between rock and a hard place during this recession.

    Effective credit control will be vital to ensuring cash flow, but it will also mean pouring more resources into credit control efforts during a time when most businesses will be looking to cut costs.

    The good news is that there are ways to automate credit control, which can help to improve your business's cash flow without requiring a lot of additional resources.

    For example, you can use software to automatically send invoices and reminders to customers when payments are due.

    This can help to ensure that your invoices are paid on time, which will improve your business's cash flow without the need to hire additional staff.

    Chaser's award-winning credit control software is used by businesses of all sizes to automate their credit control and improve cash flow. Using our platform, businesses are able to get paid up to 16-days after and reduce the amount of time they spend on credit control activities by as much as 15 hours per week.

    Many business owners are wary of using automation for fear of it having an impact on their customer relationships, but with Chaser, each and every invoice and reminder will seem like it's coming directly from you.

    The editable templates give you the ability to add your company branding and personalise each message, meaning that you can maintain strong relationships with your customers whilst also getting paid on time.

    If you're looking for ways to improve your business's cash flow during a recession, automating your credit control is a great place to start. Not only will it save you time and money, but it will also help you maintain strong relationships with your customers.


    5. Make effective use of cash flow forecasting


    One of the most important things you can do to improve your business's cash flow is to make effective use of cash flow forecasting. This will help you anticipate any potential problems and take steps to avoid them.

    Forecasting your cash flow is the process of estimating how much cash you'll have coming in, when you'll have it, and how much you'll need to pay out on a regular basis.

    This is essential for all businesses, but it's especially important during an economic downturn.

    There are a number of different methods you can use to forecast your cash flow, but one of the most effective is the "percentage of sales" method.

    With this method, you estimate your future cash inflows and outflows as a percentage of your past sales.

    For example, if you have a business that sells products online, you might estimate that for every $100 in sales, you'll have $85 in cash inflows
    (from customers paying their invoices) and $15 in cash outflows (for the cost of goods sold).

    Once you have your forecast, you can use it to make decisions about how to optimize your cash flow.

    For example, if you know that you'll have more cash inflows than outflows in the next month, you can use that surplus to pay down any outstanding debts or invoices.


    Conversely, if you know that you'll have more cash outflows than inflows, you can take steps to reduce your expenses or increase your sales in order to improve your cash flow.

    Surviving the coming recession


    Improving your business's cash flow during a recession can be challenging, but it is possible with careful planning and execution. By following the tips above, you can help to ensure that your business weathers the economic downturn and comes out stronger on the other side.

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