Make Your Business Recession Ready
Recessions can have Upsides for Businesses that are Prepared.
Economic uncertainty is running high nearing the end of Q3, with a recent Bloomberg survey of economists indicating a 47% chance of a recession in the coming 12 months. With continually rising US interest rates, international conflicts hurting supply chains, and the inflationary impacts on the consumer, business owners must prepare for a downturn (whether it comes or not).
According to Forbes, economic recessions have lasted, on average, ten months from 1945 to 2020. Business owners utilizing 13-week cash flow forecasting (TWCF) are at an advantage in recessions. Business owners, controllers, and CFOs can project the cash needs and working capital demands through TWCF.
Financial experts and lenders recognize the 13-week cash flow model as a reliable tool. Why 13 weeks? This is 1/4 of a year, and this is typically enough time to smooth out your cash flow vagaries unless your business is heavily seasonal.
The main advantages of TWCF include:
- Ability to target cash flow gaps or shortages
- You have more time to secure financing
- The business can reallocate or suspend certain expenses until they are feasible
- Visibility over critical receipts/payments
- Remain agile as the situation is highly dynamic
- Ability to stop discretionary and capital expenditures
- Identify key supplier and customer relationships that impact business profitability
- Assess payroll expenses and staffing levels for productivity and performance
Businesses utilizing 13-week cash flow forecasting are better positioned to fight new economic headwinds. TWCF model helps make strategic decisions that align short-term operating plans with efforts to maximize cash flows and enterprise value within its constraints. Suppose the results indicate a significant cash drain, losses from a primary product line, or delays in a process. In that case, you can now see the problem and act accordingly.
How to conduct a 13-week cash flow forecast?
TWCF consists of three main components:
- Beginning Cash Balance
- Cash Inflow
- Cash Outflows
With the advancements in accounting software, most programs can generate a forecast. In short, you will gather all your bank balances to determine your beginning cash balance. The next piece is to bring in your cash inflow or accounts receivable, which can be pulled from an AR aging summary. The final data set is the cash outflows or accounts payable, which can be drawn from an AP aging summary.
The week-by-week line will show your net cash position for that period. The TWCF model is great for drilling down into daily, weekly, and monthly variances while focusing on cash flow management.
Management teams and decision-makers can adjust on the fly to ensure optimal cash flow. For instance, a recent startup firm eliminated advertising spending on Google Ads when analysis showed it was not cost-efficient. It reallocated a portion of the budget to blogs, backlinking, and SEO activities. Redeploying working capital to areas yielding return while trimming specific budgets can help increase free cash flow in times of tight cash flow.