5 Steps Companies Can Take to Improve Their Financial Position in a Crisis

Business conditions are changing quickly and dramatically due to the coronavirus pandemic. But there are some measures business owners can take to improve their financial position during this time. The following strategies can help company owners limit the financial damage to their business.

Note: This article does not discuss how to handle employee issues and the associated financial implications. That topic is subject to numerous laws that are best discussed by someone with human resources and legal experience.

Improving a company’s financial position is key. It allows the company to absorb financial shocks while limiting their impact on business. To do this:

1. Establish a cash reserve

Cash reserves are a critical resource for companies. They protect a company by providing room to maneuver around difficult circumstances. If a company has a cash reserve, owners should not use it unless they really need to. It's too valuable. If the reserve is low or non-existent, work on it immediately to get it in shape. If the reserve is not sufficient, consider complementing it with financing. Possible options include lines of credit, asset-based financing or receivables financing. 

2. Examine expenses

Owners should review business expenses in detail. They should look for expenses that can be reduced, postponed or eliminated. Begin working on those expenses immediately. Be careful about cutting too deep or into strategic areas that could affect core business.  

3. Tighten credit and manage receivables collection

Recessions always bring clients who pay their invoices late, or worse, clients who don't pay at all. These clients take up resources and affect finances.

Take a defensive position immediately; don’t wait until clients default on payments. Companies should run commercial credit reports on all GC and commercial clients. These reports give a good idea of their financial strength.

Provide 30-day sale terms only to clients that meet credit criteria. Clients that don't meet criteria should be asked for an upfront payment. Every time a company makes an exception to this rule, they risk nonpayment.

Monitor accounts receivable collections processes. Accounts receivable provide the funds a business needs to operate. Avoid unnecessary delays by closely following all clients’ payment procedures. Lastly, follow up regularly with clients that are late to ensure payments are on their way.

4. Manage and adjust inventory

Managing inventory during normal times is complex. The current situation only makes planning exponentially more difficult. Having too much unused inventory is damaging. It reduces cash at a time when it is needed the most. The opposite situation is a threat to business as well. Not having enough inventory results in delays, unhappy clients and missed sale opportunities.

Inventory management has become more complex because owners have to consider the supply chain problems that can occur during a pandemic.

Work with an expert if you can. At a minimum, examine current inventory levels, forecast the next quarter or two of sales and factor in potential supply chain disruptions.

5. Consider refinancing expensive loans

During the past few years, we have seen a dramatic increase in the number of companies that get expensive loans. These loans, also called “cash advances,” compensate for their expense by being easy to get. Even during good times, these loans can be difficult to manage. They will get more difficult to handle as conditions worsen.

For those with expensive financing, determine if refinancing is the right choice for the company. Replacing expensive loans with well-structured market-priced SBA-backed loans (or bank loans) will reduce monthly costs. Consequently, the financial position improves along with cash flow.

Deciding to refinance a loan is a complex decision with many ramifications. An owner must ensure the new loan leaves the company better off. Unless a company has an experienced finance department, owners should work with a CPA or similar professional. Although their fee may not be cheap, it is much less expensive than making the wrong choice.