Generating Cash in a Tough Economy (Part 2)

Don’t forget suppliers and customers

This is the second of two columns on Generating Cash Flow during difficult economic times.

Economic downturns pose problems for all firms, and successful entrepreneurs are no exception. Many are finding it hard to generate the cash needed to take advantage of the opportunities in the current environment or are having trouble getting the credit they need to simply operate business as usual.

So what can entrepreneurs do to increase the cash position in their organizations?

In last week’s column, we looked at building relationships with traditional lenders and angel investors. This week, the focus is on two non-traditional sources: Customers/Suppliers and Cost Reduction as a means to generate needed cash flow.

Don’t forget your customers and suppliers. If you have invested appropriately in these relationships, a credit crunch may be the time to tap well-positioned customers or suppliers for more favourable terms or even a line of credit. Think about what you can do to create additional value for these partners: faster delivery, preferred service appointments, etc. Peers (other entrepreneurs within your network) may also be a source of temporary funding, although they are more likely to be of help in reducing your cash outflow through shared buying, marketing or service partnerships.

Rethink your growth strategy. Reducing costs is the other way entrepreneurs can improve their cash positions. Think carefully about implementing growth plans and be sure they generate sufficient cash in a number of scenarios. Outsource or take on partners in areas of your business where you have cost disadvantages. Rethink your views on competitors; perhaps there are ways you can work together to decrease costs (buying groups) or serve different segments of the market more effectively. Overall, remember to keep operating expenses as low as possible. A quick operational audit can often find quick wins for cash savings.

Rethink your hiring needs. If business has slowed or you foresee a slowdown in the future, perhaps you can continue to get by with fewer people. As an alternative to full-time employment, look to your local university. Many business schools now offer entrepreneurship programming, and students in these programs are eager to gain experience working with entrepreneurs. The students can be hired on a reduced or no-salary basis, as they often have to complete research or consulting projects as part of their programs. You get smart, young talent to help with pressing issues, and through your mentorship, the students get invaluable experience working in a downturn. This is definitely a win-win experience. Lastly, keep operating expenses as low as possible. A quick operational audit can often find quick wins for cash savings.

Focus on the long-term. The best advice I can give you is to stay focused on the long-term success of your company. Downturns don’t last forever and the actions you take now should position you to prosper as the economy turns around.

If you can do these things you will be well positioned to prosper. Here’s a brief summary of the main points to remember from both this and last week’s columns:

Maximizing your cash

• Think cash flow – if you can’t increase cash coming in, can you reduce the cash going out?
• Always work on relationships with traditional lenders – not just when times are tough, but all the time.
• Consider angel investors
• What about customers & suppliers?
• Try to reduce costs through outsourcing or partnerships

Eric Morse is Associate Dean, Programs, and the JR Shaw Professor in Entrepreneurship and Family-Owned Business, at the Richard Ivey School of Business.

This an excerpted version of an article that first appeared in the Ivey Business Journal.