Following closely on the heels of the pandemic and with talk of a recession looming, there is no question we are in an era marked by economic uncertainty and unprecedented challenges. Canadian small and medium-sized business (SMB) leaders are navigating uncharted waters in managing their business and importantly, their cash flow effectively. The ability to maintain a healthy cash flow is critical for sustaining operations and ensuring business resilience. In this article, we’ll delve into key financial strategies that Canadian SMB leaders can adopt to manage cash flow during uncertain times.
Understanding the Importance of Cash Flow:
Cash flow is the lifeblood of any business. It represents the movement (flow) of money into and out of your business, encompassing revenue, expenses, and operational costs. Managing cash flow is paramount for maintaining operational stability, meeting financial obligations, and seizing growth opportunities.
- Analyze and Forecast:
In uncertain times, accurate financial forecasting becomes even more critical. Analyzing historical data, often a good indicator, enables you to project what revenue, expense and operating costs your company will incur in future. Analyzing the percentage increase, year over year (YOY) may be a good indicator however, you must consider potential scenarios, such as supply and demand constraints which may impact projections. Disruptions such as labour shortages, material shortages and geo-political events can have major consequences on your cash flow requiring you to develop detailed cash flow projections. This allows you to anticipate potential shortfalls and take proactive measures.
- Build a Cash Reserve:
Establishing a cash reserve is crucial for SMBs to weather unexpected financial challenges. Strive to set aside a portion of profits as a buffer to cover emergency expenses and bridge gaps in cash flow. How much is enough will depend upon your business, but a good starting point is a minimum of six months to cover operating expenses. When the pandemic hit, many businesses were ill prepared and relied upon government subsidies or loans. Lasting several years, businesses who had healthy reserves were able to withstand the impacts and build a path to recovery.
- Monitor Receivables and Payables:
Stay vigilant about managing accounts receivable (AR) and accounts payable (AP). Prioritize bookkeeping activities or hire a professional. Promptly follow up on outstanding invoices and negotiate favourable payment terms with suppliers to optimize cash flow. Prioritize the AP/AR to ensure your cash flow projections are accurate and up to date.
- Analyze and Optimize Spending:
In uncertain times, scrutinize discretionary spending and non-essential expenses. Identify areas where you can cut back without compromising business operations. Analyzing your spend should be done on an ongoing basis however for larger more complex organizations consider an annual full Spend & Savings Analysis. Categorizing your spend into major groups such as technology, then by supplier name, will give you visibility into opportunities to consolidate your supplier base, leverage higher spend with fewer suppliers thereby enabling you to negotiate better pricing and contracts terms. Follow the 80/20 rule where 80% of your spend comes from 20% of your suppliers. Managing more suppliers and their contracts wastes valuable time and money. Hiring a procurement consultant to identify savings opportunities will more than pay for their services through savings they can help identify.
- Diversify Revenue Streams:
Relying heavily on a single source of revenue can be risky. Explore diversification by introducing new products, services, or target markets to stabilize cash flow. Consider offering consulting services to compliment your product business. Helping others by offering consulting expertise can be a great new revenue stream. Training, coaching groups, one on one or even pre-recorded training offered through an online learning management platform such a LinkedIn or Udemy can create new and even passive income for your business. Check out our 4 Steps to Agile Procurement on Udemy and explore developing your own training course.
- Negotiate with Suppliers:
Open communication with suppliers is crucial. If facing financial strain, discuss renegotiating terms, extending payment terms, or exploring deferred payment options. As with #4, start with a thorough spend analysis then review your contracts. Prioritize those suppliers and contracts that will have the greatest impact targeting those with whom you spend the most (80/20 Rule again). A great way to incent suppliers is to conduct a competitive bid and consolidate spend in a particular category (i.e., technology, raw materials etc.) with a preferred supplier. Competition drives fair market pricing and terms and conditions. Establishing preferred suppliers is good for suppliers. It enables them to plan and forecast better thereby helping them to optimize and in return offering preferred pricing to you the customer. Consult with a professional procurement consultant like ProcurePro to help you with your Spend Analysis and Negotiations.
- Implement Lean Inventory Practices:
Excess inventory ties up valuable cash. Adopt just-in-time inventory practices to minimize carrying costs while ensuring you meet customer demand. Tracking your inventory turns, the rate that inventory stock is sold, used or replaced and drive to increase your inventory turns where possible. Having an inventory turn of twelve means you have one month of inventory on hand to fulfill orders. It’s different for each business. Higher turns generally mean an unrestricted flow of supply is available versus lower turns may mean supply is constrained. Read 10 Tips For Optimizing Your Inventory for more ideas. Working with a procurement expert, can help you optimize inventory freeing up much needed cash flow.
- Seek Government Assistance and Grants:
In uncertain times, explore available government assistance programs and grants that can provide financial relief and support for your SMB. The Government of Canada offers various grant programs depending upon your sector and industry. Visit https://www.canada.ca/en/government/grants-funding.html for more information.
- Embrace Technology for Efficiency:
Invest in financial management software that streamline processes, automate invoicing, and enhance financial visibility to make informed decisions. In today’s uncertain economy and rapid deployment of eCommerce solutions, businesses must embrace technology as a foundational requirement to running and growing their business. Depending on your size you may already have several applications to help you run your business, however, avoid disparate hodgepodge systems as ultimately, they will waste valuable time and money. Read the article on Disparate, Hodge Podge Business Systems: How SMB Can Avoid Stressful and Costly Upgrades
- Scenario Planning:
Plan for various scenarios, from the best-case to worst-case scenarios. This helps you devise strategies for responding to different economic outcomes. Brainstorm with your team, those closest to the work, on ways to streamline and optimize. While many companies fall back on reducing headcount this may not always be the best or only solution. Fail to Plan you Plan to Fail!
Canadian SMB leaders face an evolving business landscape that demands strategic financial management. Managing cash flow in uncertain times requires vigilance, adaptability, and a proactive approach to mitigate risks and seize opportunities. By employing these strategies, SMB leaders can safeguard their businesses, enhance resilience, and position themselves to thrive amid uncertainty. A solid foundation of effective cash flow management ensures that your SMB can continue to grow, innovate, and contribute to the vibrant Canadian business ecosystem.
Jill Button, President & CEO, ProcurePro Consulting