Cash shortages can be a nightmare for companies and the current “econovid” crisis is making businesses extremely fragile. To ensure the continuity of your business, you must protect yourself against the risk of cash shortages. Here are 5 tips to help you protect your cash.

 1. Operational plan

Starting point: your internal organization. Cash is not a Sale; Cash is a Payment from your customer.

First, increase the speed of your Accounts Receivables by improving your invoicing process – it should be fast and efficient. Likewise, organize your cash collection to get customers to pay on time.

Second, make your payments as late as possible. The later you send payment the longer your cash is available. With digital banking you can set up a debit to pay your expenses on the final day they are due. You may also renegotiate your payment terms with suppliers.

And finally, work on minimizing your inventory costs by better inventory management.

These processes may not be so easy to review, Penon Partners consultants can help you improve the fluidity of your business.

2. No cash for investment

Keep in mind that not all expenses should be treated the same. Some are better managed as long-term and others are short-term.

Things used in day-to-day operations are usually paid for in “cash” and therefore are generally considered short-term expenses.

For any goods with a lifetime of more than one year, you must systematically have the proper financial arrangement: loan, rent or lease.

This will allow you to maximize your cash reserve for use when other financial terms are not desired – or not available – giving you the ability to deal with surprises and emergencies.

3 . Transfer margin to cash

There is no direct link between profits and cash: a company may very well have a profit and an overdraft at the same time.

To avoid this, prioritize cash over profitability. This may mean temporarily accepting less margin to gain cash. You could factor your receivables to get the cash sooner or offer a discount to your customers for early payments.  You could increase sales operations or buy in smaller quantities. By lowering your margins, you will restore your cash flow. And when your cash flow problems are resolved, you will be able to focus again on profit optimization.

4. The bank as a partner!

Increase your short-term credit, especially your overdraft lines with your banks. And, request this before you need it and while business is good. Many companies wait till they actually need the funds and the bank is less likely to provide favorable terms. A transparent relationship with your bank is key to the success of your company in good times and bad.

5. Build a short-term cash forecast

You need to set up a system that is both simple and reliable, that allows you time to react. The exercise is not easy but Penon Partners can help you!

Written by Carole Devies, cdevies@penonpartners.com,  Practice Leader – Finance Transformation Consulting, at Penon Partners.

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