How to manage your company's cash flow in turbulent times

Careful planning, ongoing monitoring and adaptability to changing conditions can help your business thrive in any economic climate – whether you’re facing headwinds or harnessing tailwinds.

Of course, it’s easier said than done, especially when simply running your business and serving your customers demands your attention. That’s why it pays to lean on financial advice and guidance from financial experts. 

Samuel Chinniah is a Senior-Vice President in CWB Wealth’s Toronto office. Working with executives and high-net-worth families, he provides comprehensive wealth management solutions, including aligning advanced planning to his clients’ lifestyle needs. His expertise also includes wealth management, tax and estate planning and retirement preparation.

Let's start with the basics. What are some best practices of good cash flow management – and what specifically should business owners be doing in a downturn?

Managing cash flow is always important, and more so in recessionary times when revenues can be declining or less predictable. A little planning goes a long way, and too often I find people wait until they reach a pain point before reaching out to me. If no one is tracking what is coming in or going out, you could end up in a very challenging situation.

Here are some things you should always do as a course of good cash flow management:

 

• Always plan to build up cash reserves in good times. It's easier to access credit and have liquidity available when you’re prospering. You might need a line of credit when you're going through tough times.
• Conduct business assessments regularly.
• Analyze your profit margins regularly, and negotiate with creditors if you need to.
• Create a regular cash flow forecast with a cash management expert. This will help to better manage your working capital.
• Streamline and automate your processes to improve productivity. 

Here are some specific things you can do during a downturn:

• Look for ways to reduce expenses, including discretionary expenses.
• Review and simplify your billing process to get paid faster.
• Revisit your capital structure.

The conversations we’re having with business owners right now tend to be about business planning in preparation for a tougher period. For many, there's been consideration for rising interest rates, even for unprecedented circumstances. That goes to show that the relationship we have with our clients is a calming force regardless of what the economy is doing. 

A volatile economy can produce some tempting acquisition opportunities, especially for those with an entrepreneurial mindset. An acquisition has a direct impact on cash flow though, so how would you advise a client who might be considering one?

Regardless of the interest rate environment, business doesn't stop. We look at acquisitions through that lens. The decision to finance an acquisition, or our approach to financing a business, doesn't change based on the state of the economic cycle. Yes, we have sensitivity and metrics to ensure we take a prudent approach to the way we manage our risk, but ultimately, our philosophy remains consistent. If the business is strong and the opportunity is sensitized accordingly, we’re open to a conversation about it. We’ll work to understand the impact an acquisition can have, and model the outcome. Again, come talk to us. If you have something you’re thinking about doing, proactivity is key. 

 

Entrepreneurs and high net worth families will always have opportunities that come their way. The question is: do you jump in and take advantage of the opportunity, or can you even afford it?

My role is to make sure clients have the working capital and cash flow reserve to manage their ongoing needs, and that the heart of the business won’t be affected by taking on another project. You don’t want to add undue stress.   

What are some options for business owners who are grappling with higher costs but also want to limit passing on price increases to their customers?

For many business owners, it's about finding creative ways to control some of those costs. Many will simply have no other option but to pass on price increases to their customers. But if that's not an option, and you're looking to maintain margins, you can only focus on the expense side. And that can be a big challenge because some expenses are fixed, there's not a lot of discretion.

That’s where providing attractive pricing terms can help – like a discount with some vendors, or renegotiating terms with them to receive additional discounts.

As always, it never hurts to talk to your banker. We would look at your cash flow and see where there’s wiggle room. If there is, we’d act quickly. 

Do you still think “good” debt exists in a challenging economic climate?

I consider good debt to be tax-deductible debt, while bad debt is non-deductible. Using debt to your advantage, you could finance something in a way that shows positive cash flow or a profit, and it’s also tax-deductible – you might even consider that great debt. It requires analysis for me to make that assessment, but these situations do exist.

Ultimately, when you think about taking on good debt, tax-deductible debt, you're not looking at a term of 12-months or less. Typically, the window for good debt is long-term: 10 or more years.

 

Ok, here’s a scenario: A business recently regained a cash flow-positive position after a hard time. How long do they need to maintain positive cash flow before speaking to their CWB Relationship Manager about a business line of credit?

When you reflect on the impact of COVID, many businesses had cash flow challenges through that period. Many businesses had a hard time managing cash flow, even staying open.

Generally, we're looking at the six-month mark. However, like anything in commercial credit, it depends.

It depends on what characterized the hard time, the actual impact to the business and how the business may have pivoted to get back into a positive cash flow position. Is there a risk of that challenge reappearing?

We’d want to take a deep dive and understand the business model. We understand that things happen, including unprecedented events like COVID-19. With that in mind, we’d ask: Is this a sustainable business model? Is it a business CWB can believe in? And just as importantly, we need to put the challenge in context: what would have happened to the business if COVID didn’t happen? There is a story to understand with every business, including the sustainability and predictability of its cash flow. 

For business owners on a variable-rate loan, what can they do to increase their liquidity while grappling with higher interest payments?

Proactivity is key. You need to understand what the costs are, and then you should have a conversation with your Relationship Manager. We’d look at different things with you – perhaps there are refinance opportunities or ways to bridge the short-term pain of higher rates. Some clients have passed on these additional costs to their customers. Every business is different, as is the advice we provide. It's always a good time to have the conversation with your financial partner and put a plan in place.