How to take financial precautions to keep your cashflow healthy during a downturn

When you should cut spending and take control of cashflow

Investment and finance

Putting expansion and further investment on a back burner is wise at times of recession, the Federation of Small Business (FSB) advises. “If there is something which needs replacing – perhaps a machine or a car – then consider waiting a while before you replace it,” argues Stephen Alambritis, the organisation’s spokesman. “As a business, you need to be a saver rather than a spender, and set money aside for when you need it.”

Others say delaying investment is risky, and that small businesses need to maintain a minimum level of investment to ensure they can expand quickly when the upturn comes.

A downturn is a perfect time to check levels of investment and look at cheaper sources of finance. Draw up detailed cashflow forecasts: if your projections show, say, a 20% downturn in business, then you need to make moves to allow for that loss of income.


An Association of Business Recovery Professionals survey of failed businesses has found 9% of businesses failed because of bad debts, with a further 21% going to the wall because of loss of long term finance or a lack of working capital. Cashflow problems are the weak point in any small business, and hard times are likely to make the problem worse.

So what can small businesses do? “Never put all your eggs in one basket,” counsels Street, “because if one major client runs into difficulties, your business will do the same. It leaves you terribly exposed if you just have one or two major customers who might then halve their orders.” Diversifying is the key, and this is the time to look for new clients.

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Tightening up your credit terms helps too. Figures from the credit reference agency Experian show that the average payment time is now around 60 days – and although that represents a decrease, the figures hide the number of large companies who delay payments as long as possible.

But you can take steps to cut down on delay: healthy businesses issue invoices promptly, specify the credit period offered, and chase overdue invoices courteously and persistently. “At times of economic downturn, it is particularly important to check that your invoices are being paid,” counsels Barry Franklin, business adviser at Business Link.”

To put it bluntly, your job is to make sure you get your money before the others do. But you have to be careful: client retention is important, and it is difficult to chase unpaid sums at the same time as you ask for more orders.”

Having a detailed business plan complete with profit and balance sheet forecasts will help you spot problems in the early stages. Warning signs are obvious with hindsight: watch out for payments that are made late, credit and debit notes, and for credit limits being exceeded. Consider reviewing the credit periods offered, or even obtaining payments on delivery. You could also consider factoring or invoice discounting or negotiate schedules for payment in difficult cases.

You are also entitled to charge interest on late payments and even take debtors to court. No one wants to offend a valued customer, but a customer who does not pay is costing you time and money. “Cash is king in business, and many a profitable business has run into difficulties simply because it has run out of cash,” advises Kelleher.

Being paid is, for many small businesses, a carrot and stick approach. On the one hand, you can check customers’ creditworthiness carefully, paying a nominal fee to credit agencies and asking for bank references, then being clear about credit terms. A more tactful approach is to offer discounts and incentives for prompt payment, or to ask for payment in full or in part with delivery in dubious cases.

“Managing debtors may not be as satisfying as making sales, but it is just as important,” argues Anthony Levy, news editor of Credit Management, in YOUR BUSINESS AND YOUR BANK, (jointly published by the Institute of Directors (IoD) and Alliance & Leicester). “As old hands in the credit industry say, ‘No sale is complete until you’ve been paid.'”

To cover any shortfalls, build good relations with your bank. “Research among IoD members suggests directors have a positive view of their bank, rarely have requests for finance refused and enjoy good support in tough times,” argues George Cox, IoD director general, in YOUR BUSINESS AND YOUR BANK. “But that is exactly what was said before the last recession. When the downturn came, some banks behaved appallingly. Could the same thing happen again?

“The key issues for directors are to understand the full range of banking products available to them and, above all, to build a strong relationship with the bank that is providing them.” Keeping in touch with your bank is vital: make an appointment to discuss the range of products and services on offer, and you could benefit too from better interest rates on new accounts.

“Take advantage of the services available from the bank,” advises David Singleton, managing director of business banking at Lloyds TSB, “these are designed to improve the survival chances of businesses and may include useful packages, such as bookkeeping or cashflow management.”

Banks don’t like surprises, he warns: “Contact the bank on a regular basis and get into the habit of providing your bank manager with financial information. Staying in touch even when things are quiet is crucial – silence certainly isn’t golden to a bank manager!” Street advises, “If you might need to increase bank borrowing then it helps to show proper figures on your cash flow position, which puts you in a much stronger position.”

To put it bluntly, your job is to make sure you get your money before the others do.


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