Slow Economic Recovery Makes Business Cash Flow A Priority

by Doug Smith, President, The Woodhaven Group

The economy is not bouncing back as quickly as some expected.  There is confusion and doubt about the path of the economic recovery.  Even the economists that projected a choppy recovery are seeing that the resumption of growth is slower than anticipated.

This means more than ever, it is important for every business of any size to maintain a strong cash flow position.

In my opinion, the facts supporting a continued slow recovery are obvious:

  • Consumer confidence remains mixed at best.  Two different reliable reporting groups  reported May consumer confidence moving in opposite directions.  For many reasons, I believe consumers do not feel good about things now and I don’t see that changing for a while.  The future of the economy is tied directly and indirectly to the feelings of the everyday consumer.  If they are not confident then the consumer will not spend and cash flow of businesses will be impacted.  This important indicator will have to be closely monitored going forward to determine what the real truth is.
  • Housing sales are not showing any upward momentum.  With the government tax credits going  away there are fewer homes being sold.  This decline reverberates throughout the economy.  There will have to be a further drop in prices to trigger an increase in demand.
  • Commercial real estate problems still exist.  Increased vacancies in retail and office space is a reflection of a soft economy.  If businesses do not expand or even reduce in size then they don’t need space.  The landlords holding this space still have mortgages to pay. This problem will still be a front burner issue in 2011.
  • There will be no more government stimulus prior to November 2010 elections. The prior stimulus methods temporarily helped boost the economy.  The political mindset now is to reduce debt.  Going forward,  the private sector has to carry the weight of the recovery by themselves. 
  • The Federal Reserve will not reduce interest rates further.  When it comes to lowering interest the Federal Reserve has done all that it can.  Don’t look for lower rates to further stimulate the economy.
  • The unemployment is still high and will be for the forseeable future.  Government census workers helped boost employment for awhile.  Additional workers will only be hired as business confidence suggests a reason to expect improved revenue over the longer term.  That confidence currently is not there.

So, what should a business be doing?

Here are 7 action steps your company should be doing right now:

  1. Have realistic revenue goals going into the second half of 2010.  Do not gear up for a sales increase that won’t be there.  Your original sales projections for the year may now be outdated.   All other expense areas take their direction from the sales plan so get it as accurate as you can.
  2. Know your business’s breakeven point.  Make sure you operate at or below it.  Failure to do this will consume precious cash flow.
  3. Maintain good relations with key suppliers.  Don’t create surprises for your partners and you will find most of them will be there to help if you need assistance like extending terms.  Do this by communicating how things are going.  It helps your suppliers plan for the future too.
  4. Do not lose existing customers while attempting to generate new business.  New customers cost more to add than keeping old customers. If you have a zero sum game with the number of customers in  your database this too will eat up cash flow. A tip to keep customers happy is to deliver some type of  added value (ie: free shipping, etc) that may not be expensive to do but is attractive to your customer.
  5. Now is not the time to start new projects.  Keep a cash reserve and add to it if possible.  New opportunities will still exist in the future.  Make sure you are there to capitalize on them.
  6. Keep marketing costs in line with revised sales projections.  Do not assume that by increasing the marketing budget that more sales will automatically follow.  Don’t stop marketing but invest dollars in marketing channels that are proven.
  7. Keep gross margin in line.  Do this by making sure you are priced to make a profit.  That does not prevent you from running a short-term promotion that might temporarily decrease gross margin percentage but increase gross margin dollars.

A positive:   Banks appear to be adding fewer reserves for bad loans than before.  This will increase earnings and should start freeing up money to lend to consumers and businesses. This will be one source of cash flow that well run businesses will need in order to grow going forward.

Make sure your business model and financials are in good shape to access this cash from your bank as it becomes available.

Cash flow is the lifeblood of any business, especially in uncertain times.  Make sure you are protecting it.

Advertisements

Tags: , , , , , , , , , , ,

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: