Table of Contents
Partner of Eventus Advisory Group, LLC., helping companies meet their CFO, Finance and Accounting needs with fractional teams.
In challenging economic times, the role of finance and accounting departments becomes even more critical. The decisions made in these departments significantly impact a business’s survival and ability to perform during tough times.
However, the approach to managing finances should not merely be about cutting expenses; it should be strategic. In this article, I explore five key strategies that your finance and accounting departments can employ to help navigate a recession.
1. Reevaluate All Spend, And Prioritize Accordingly
The first step is to reevaluate all expenditures. Do not immediately resort to cost-cutting.
Take the time to assess your current financial situation while considering your future goals. This process should involve a thorough examination of your entire budget, both expenses and income streams. This approach allows you to prioritize spending on initiatives that align with your strategic objectives while eliminating or deferring expenses that may no longer be relevant or necessary.
Have your team look closely at the contract terms and conditions of all the company’s spend. Knowing what each vendor relationship allows with respect to payment terms will help in the next step.
2. Relentlessly Manage Cash Flow
When your business faces challenges, cash flow management is paramount. The process is two-sided: income and outflow. Your business must receive payments on time, and you cannot risk situations where it will not.
You need to hold cash as long as possible and let it go in priority order. For example, if you pay employees on the first of the month, that is a priority payment. On the other hand, if a vendor accepts payment in 60 days, wait to make that outflow. Overall, effective cash flow management is going to include the following:
• Invoicing clients promptly, and following up on payments diligently. Do not let outstanding invoices linger, as they will strain your cash flow.
• Do your best to avoid high-risk partnerships that could jeopardize your cash flow. Before your company takes on a new client, make sure your staff evaluates their creditworthiness. Are they good for the money they will be charged for goods or services?
• If you have a deep understanding of both inflows and outflows, you can use this knowledge to plan for potential negotiations with vendors. Your business has financial commitments, too. This allows you to avoid overdue payments or making early payments when the cash needs to be spent elsewhere first.
• Instead of relying solely on bank balances, you should learn your cash flow patterns. You know you have certain recurring expenses due at certain times, salaries on the first, rent due on the fifth, utilities on the 15th, etc. Your vendors have specific terms in their contracts that manage when you must pay them. Look at the entire pattern of your outflows and use them to make informed decisions about when to request payment extensions or negotiate contract terms. If you do not need to upset a vendor relationship, don’t.
3. Include Strategic Initiatives In Your Cash Flow Planning
Every business has longer-term initiatives that need cash; your cash flow planning should encompass strategic initiatives. Collaborate with finance and accounting to ensure that the investments you want to make align with available cash and revenue projections. It is essential to assess whether your cash flow can support the investment.
This evaluation may lead to negotiating favorable payment terms from a new vendor or requesting upfront payments from a new client or partner. Only bargain for worthwhile accommodation, and only if you need to.
4. Do Not Spend Money You Do Not Have
A common pitfall is spending money based on assumed, not actual, revenue and cash flow. Budgets may have expectations of landing certain contracts or achieving specific revenue milestones that do not happen, which leads to expenses that outpace actual income.
Adopt a philosophy of not spending money you do not already have; every expense must be covered by existing funds, not expected income. Regularly revisit the assumptions made about revenue during the budgeting process to make sure they are valid. Doing so will help prevent the mismatch in spend and revenue expectations.
5. Evaluate And Reevaluate The ROI Of Initiatives
Not every initiative you undertake generates the same ROI. A new office may be nice, but it may not be as profitable as an investment in a new product line that a major customer wants. ROI evaluation should extend across all initiatives including marketing campaigns, new product launches and operational improvements. When evaluating your initiatives, consider the following:
• Before launching any initiative, establish clear metrics and ROI expectations. Ensure that all stakeholders agree on these parameters upfront.
• Continuously monitor the performance of your initiatives against the established metrics. This allows you to detect any deviations from the expected outcomes promptly.
• If you find that your assumptions or chosen metrics are no longer valid, be flexible enough to adjust your evaluation criteria. This adaptability ensures that you make informed decisions based on real-time data.
• Implement a gating system for expenses, scrutinizing each expense against its ROI. If an initiative is not delivering the expected results, reallocate the resources or stop spending against it.
Check In And Communicate Regularly
As a final thought, make sure you and your teams are communicating regularly and sharing the information and data they have. Compare them against all your plans and assumptions. It is not helpful if just the finance and accounting team sees an issue coming; everyone needs to be on the same page and share information openly.
Dealing with challenging economic times is a multifaceted endeavor that requires strategic thinking, adaptability and a deep understanding of your business’s financial health. During a recession, your finance and accounting departments have a pivotal role in guiding the company toward success. In an interconnected world, these strategies can form a comprehensive approach to your business’s financial stability and growth.