Financial business resilience

Financial resilience means having a business that not only earns enough income to stay operational, it has money set aside to get through tough times. Building your cash reserves is a vital move that ensures your business can survive changes in the market or unexpected emergencies. Along with increasing your income, financial business resilience also involves managing your expenses, improving efficiencies, and making strategic financial decisions.

Here are some ways to build a financially healthy business.

Build short-term cash reserves

There are probably numerous ways you can free up cash within your business so you can save some in reserve for an emergency. For example, there could be machinery you no longer need or vehicles that could be sold and turned into cash. These could then be leased back when you need them.

Other ways to raise extra working capital include: 

• Negotiating better terms with suppliers, such as longer payment terms or discounts for volume purchases. This reduces your cash tied up in supply and inventory. 
• Liquidating excess inventory or raw materials that are not needed and likely won’t otherwise be sold so they can be offered at a discount to free up cash. 
• Re-investing your own capital into vital areas of the business, which allows you to grow without incurring any additional debt. 
• Refinancing against your existing assets can provide you with money, but may require a solid credit history.
• Finding external investors, such as angel investors, venture capitalists, or crowd funders.  

Look closely at the business assets on your balance sheet to see what you don’t need and consider what you can convert into cash without impacting your core business.

Strengthen the foundations

Now is the time to make permanent changes to strengthen your business, which are often things you’ve thought of doing but haven’t had the time, or didn’t need to do when sales were steady. This includes how your business can operate more cost-effectively while maintaining or improving efficiency.

Take time to document every step of your business process to improve your capacity to do more with less. Other ways to be more resilient include: 

• Having multiple customers or market segments to sell to, so that if one experiences a market shift you can rely on others until the market becomes stable again.  
• Diversifying into new growth markets as even in times of crisis some businesses will thrive.  
• Widening your product or service mix so you do not rely on the whims of the market regarding one product or service.  
• Amending your terms of trade to collect money faster by tightening your payment terms, being quick to follow up on late payments, and running credit checks before offering credit.
• Eliminating any part of your business that doesn’t make a profit or scaling it back until it becomes profitable again.  

There will be a number of key decisions to make your business leaner. While you may have an instinct about what is and isn’t profitable, take a look at the numbers to verify your thoughts. Your data will help you make important decisions to enhance your profitability.

Maintain your margins

A reduction in gross profit is a key warning sign of a deteriorating cash situation. Monitor the factors that can negatively affect your gross profit margin such as: 

• Increases in raw materials or product costs, which also increase your costs and lower your profits 
• Reductions in profitable sales, which directly affect your profits 
• Discounting by staff, which cuts into your profits especially if discounting is done too frequently or without a strategy 
• Wastage during production, which means you’re paying too much for materials that aren’t being used  
• A loss of quality, which increases customer returns and undercuts your profitability.  

Select the two or three key warning signals that matter to your business and then set up regular monitoring to remedy any decline.

Tighten credit control

An efficient credit control system speeds up your cash collection and reduces bad debt by limiting how much credit you provide to customers. You could consider collection options such as:  

• Requesting deposits or progress payments
• Using credit scoring systems and setting appropriate credit limits
• Credit checking all customers
• Monitoring late payments
• Setting up a process to follow up with debtors
• Charging interest on late payments
• As a last resort, using a debt collection agency or specialist lawyer.  

Identify future cash flow

Sketch out a number of cash flow scenarios to identify what your business would look like in the future when sales drop (or cease) over a period of time, and develop contingencies in advance. For these scenarios, you could consider what costs you may no longer have, additional cuts you can make, what revenue you’ll need to break even, and how long it will take to recover.

Each drop in sales will usually have a corresponding fall in variable costs (materials, cost of goods sold), but at some stage, you may find it’s uneconomic to continue with certain products and services if the fixed costs are too high. In these cases, you may have to lower your overall cost base (possibly making staff redundant, moving premises, or closing less profitable product lines).

With each of the cash flow scenarios, you could outline the actions you may need to take to continue trading now.

Protecting your supply chain

It won’t only be your business that’s impacted by a crisis. Outline what may happen to your key suppliers and identify risks to your business if they were suddenly no longer able to deliver. This is especially critical if you have exclusive or hard to replace materials or products as part of your own delivery to customers.

Develop an alternate supplier plan and consider reaching out to these businesses as back-up if your existing supplier can’t deliver.

Next steps

You may be able to pivot your business to find new revenue streams through finding different customers or markets, developing new products or services, or finding new ways to sell to your customers. Solid first steps include building your cash reserves, strengthening your business foundations, and monitoring your margins. Outline what you aim to implement to bring your business back to positive cash flow and then profitability. 

Managing a Business