How to Build the Cash Reserves You Need to Guard Against the Next Downturn
The building supply industry is a notoriously cyclical industry. But this can be used to your advantage. The reason is simple: companies that survived the Great Recession (and emerged in a good position to thrive) enjoyed healthy cash flow and prudent A/R management practices that buffered them against risk. That kind of positioning shows a discipline and focus that is the hallmark of the most-admired and successful companies.
The reason that these best practices are top of mind today is that after seven years of recovery from the Great Recession, the next cyclical downturn may not be too far in the distant future. Are you prepared?
You can prepare in several ways: prudence with new hiring, delaying speculative purchases, and minimizing infrastructure investment. But the old adage “cash is king” should really be the guiding maxim for action today. Conservative business managers suggest that you should have three to six months of operating cash on hand at all times. That cash represents a hedge against unplanned expenses, which are inevitable in the life of any business. But more importantly, cash reserves can provide you with the edge you need to outlast less-prepared companies that might crash out in a down economy.
How do you improve cash flow management so you can build up a cash reserve? Here are four areas to focus on, all aimed at reducing risks and preparing for when even your best customers start going out 45 or 60+ days.
- Receivables. Shrink the gap between AR and AP. As uncomfortable as it may be to have these kinds of conversations, request that all customers pay down or entirely clean up their delinquencies. Move customers with severe delinquency payment trends to COD.
- Credit Management. Consider using a B2B credit management company that will fund you upfront for your sales and protect you from credit risk. Companies like BlueTarp offer this service as part of a customizable program that frees up cash flow and offers credit monitoring, billing, and collections.
- Credit Insurance. Consider obtaining credit insurance for customers in the high-risk quadrant of your customer quality profiles. Ask yourself: Will the delinquency of one or two customers sink your business? If so, you need to address that before the economy turns south, and if the economy doesn’t slow, you’ll be thankful for your new positioning.
- Credit Monitoring. Credit monitoring services like Experian, D&B, or Cortera can provide valuable insight into the financial condition of your customers. Prepare to pull credit reports three times a year, with a special focus on customers that are the most risky.
If any of these suggestions seem more aggressive than what you want to take, imagine yourself back in 2006 prior to the Great Recession. What actions would you have taken had you known the chaos that was to come? We all hope the next cyclical downturn is not as bad as the one we recently experienced, but the point is to take thoughtful action to ensure the health and growth of your business in good times and bad. Good cash flow enables you to run a successful business, one that offers superior customer service, a rich inventory, new product introduction programs, and stellar staffing and equipment. Anything less, and you are selling yourselves and your customers short.
About the Author
Scott is president and CEO of BlueTarp. He has spent the majority of his twenty year career in financial services helping businesses grow more rapidly through the effective use of credit.More Content by Scott Simpson