Second of two parts
Part 1: Top 5 ways small businesses can survive an economic downturn
Part 3: Small business survival: Revenue forecasting and cost-cutting
One of the biggest survival steps for small businesses during an economic downturn is to truly understand their financial statements, specifically their balance sheet.
Too often, a small business owner loses track of important balance sheet accounts that could build long-term stability. The goal should be to turn these non-cash assets into cash as quickly as possible.
You’re probably asking, “So what balance sheet accounts should I be looking at?” Here are the top five:
Proper cash management will yield additional cash in the form of interest.
If your company is fortunate not to have short-term loans, it can invest this cash in interest-yielding vehicles. If you do have short-term loans, paying down lines of credit will reduce the amount of interest due. Either way, making your idle cash work for the business improves your bottom line. Invested cash yields more cash.
Read more: How to manage your business’s cash flow
2. Accounts receivable
Accounts receivable tracks the amount a customer pays for goods or services, so collection equals cash. Guidelines must be followed to ensure cash is received when it’s due, per your company’s terms. Establishing a documented credit policy and adhering to it will help assure timely collection of the balances due.
Inventory can be in the form of raw material, work-in-process or finished goods. The finished goods are made available to be sold to customers and, upon collection, turned to cash. Sold inventory leads to cash.
Inventory is generally considered the least liquid current asset; therefore, it should provide the highest yield to justify the investment. It should not be overlooked in proper cash management. Along with warehouse costs for storage, bringing in these raw materials before they’re required leads to an unnecessary cash outflow. Small businesses should institute a just-in-time policy to monitor proper stock levels. Slow-moving inventory should be evaluated to determine its resale value. Some cash today is better than none tomorrow.
4. Fixed assets
Fixed assets are property used in the operation of a business, such as buildings, machinery, fixtures, furniture and equipment. The fixed assets that can assist in cash generation are generally machinery and equipment used in the production of inventory or products that will be resold. Since idle equipment will not generate cash, it is important to keep equipment operational so that you can continue to produce product. Measuring equipment utilization will help determine whether it is providing an adequate return.
5. Accounts payable
Accounts payable tracks the amount owed to creditors for purchased goods or services. Proper cash management must not only include inflows but outflows as well.
Guidelines must be followed verifying that over- or early payments do not occur. You should document how payments are made to suppliers, and you should include in the procedures when and if cash discounts should be taken.
Next on how to survive a recession or downturn
In part 1 of this series, we covered the five factors that most impact financial results. Next, in part 3, we cover how to cut costs and how to know what you’re doing is working. Click here to read part 3.