For businesses, there’s never a time when cash-flow isn’t a critical component to proper management and growth. During a softening economy, however, it’s absolutely essential to survival.

We recently spoke with Gravitas Impact premium coaches Randy Gardiner and Lynn Hartrick about the cash-flow strategies leaders and coaches should utilize before and during a recession. Here’s what they had to say.

Making Calls While Balancing Uncertainty

One of the more difficult parts about preparing for an economic downturn is balancing the uncertainty about when/if it will hit and how bad it will be. The last thing any leader wants to do is make a knee-jerk reaction that ends up hurting the business in the long run. So how should leaders proceed?

“The key is to be proactive in planning and communication both internally and externally,” Hartrick said. “When facing weaker economic times, it’s better to plan than to panic. Knee-jerk reactions lead to poor and costly decisions. A sense of panic will spook customers, creditors, vendors and customers. Presenting them with a plan that helps them (and you) is much more productive and profitable –especially if it’s proactive planning instead of reactive planning.”

Following that, Gardiner proposed that businesses play a “what-if” in which leaders attempt to answer the question: “What if my business takes a 10/20/30 percent slowdown?”

“Even if you only do annual models and reduce revenue/sales by those numbers (with associated costs), it will give you an idea of where you need to make changes in the overhead and direct cost areas,” Gardiner said. “When things start going south, you’ll have already made rational ‘psychological choices’ that will protect the business.”

Aside from planning and communication, both coaches offered some direct actions leaders can take to shape up cash-flow without sending everyone into a panic.

Gardiner suggests focusing on primary sources of latent cash, such as:

  1. Slow paying customers – Making a call “owner to owner” can have an immediate effect. Try to get them to pay with a credit card instead of slowly chipping away at a large, past due account. They’re not going to get faster in a downturn.
  2. Slow inventory – We don’t often like to acknowledge mistakes in our buying practices, but liquidating slow moving inventory is an immediate way to reclaim cash and write off losses before they look uglier on the balance sheet in a slowdown.
  3. Recurring expenses – Many services get initiated and continue well past their value because they “blend into the woodwork.” These may no longer be necessary, or they can be replaced by less expensive options.

Hartrick offered some parallel suggestions:

“Focus even more intently on some of the basic levers such as accounts receivable, accounts payable and discretionary spending. Think about doing some house cleaning to reduce overhead. Slow down on adding to the headcount and/or remove underperforming personnel. Re-examine capital spending or delay/postpone it all together. This may be an opportune time to renegotiate pricing with suppliers.”

Growing Through the Storms

With proper planning and attention to detail, businesses can increase their chances of weathering a softer economic cycle. But what about the potential for growth?

“A slowing economy does not necessarily mean leaders cannot continue to grow, or even scale, their business,” Hartrick said. “In fact, a slowing economy may present prepared leaders with unique opportunities to grow even faster. When most are selling, it may be a good time to buy. When suppliers are concerned about a downturn, leaders may be able to negotiate not only better prices but better terms as well.”

“You can implement extended payment terms with key suppliers,” Gardiner added. “I’ve been regularly surprised how easy it is to push out payment terms with suppliers. In some instances, they’ll bend over backward in order to keep the competition out of your business.”

Of course, both coaches recognize that neither survival nor growth is possible without honest communication and a rigorous devotion to fundamentals. When caught in the thick of a downturn, leaders and coaches alike have a responsibility to keep track of daily sales, cash receipts and checks to suppliers – all while keeping critical partners in the know.

“A big mistake is to start withholding information from employees and creditors,” Hartrick said. “Keep them informed and involved. They want to help. They have a lot at stake. They want to win. It is important to deal with the facts.”

Examples of Successful Leadership

Before closing, we asked both coaches to provide a personal example of a time they’ve successfully helped a company manage, protect, or increase cash flow during a soft economy. Here’s what they had to say:

Gardiner: “We were in a downturn and at the beginning of our season when we needed extra inventory for sales and manufacturing. We asked all of our suppliers to give us 90-day terms for 6 months. The majority agreed without asking any serious questions. We’d always been good to them and it came back in spades.”

Hartrick: “In 2006 I was the CEO of a turf management firm providing services and products to customers in five states. This private firm had been poorly managed since the death of its owner and CEO.  Cash was extremely tight and credit lines had been stretched to the breaking point. The firm was in the worst possible condition to face an economic downturn. We went to work reducing inventory, introducing lean processes into the supply and service areas, and renegotiating contracts with vendors and suppliers. We engaged employees by showing them the books and seeking their ideas on how to reduce costs and improve productivity. We met with our banker and rolled out a 2-year plan for financial improvement. We serviced around 1200 golf courses and I met with the superintendents of the top 300 over the course of my first year. As a result, we fine-tuned pricing and service options. We re-designed inventory items and levels. In the summer of 2007, we conducted a successful sale of the business having substantially strengthened the balance sheet – most especially cash.”

  1. Be proactive in your planning. Engage in what-if scenarios regarding cash reductions and plan for each one.
  2. Be upfront and honest. Communicate well with all parties, especially critical partners like banks, suppliers and customers.
  3. Look at shoring up areas of latent cash, such as slow-moving inventory, recurring expenses and customers who are past due.
  4. Don’t just consider “surviving” a possible downturn. Look for ways you can grow, such as buying when others are selling.
  5. Stay focused on the basic fundamentals. Watch sales, cash receipts, and outgoing checks daily. Drill down on basic levers, such as accounts receivable, accounts payable and discretionary spending.

Don’t forget to register for the EntreLeadership event in San Diego! This event will provide our coaches with the potential for longer engagement, more opportunities, and referrals! The event is sold out, but Gravitas has reserved seats at a special reduced rate for our coaches. Click on this link for more information on registration and speakers.  Joining the superstar line up of incredible thought leaders is Carey Lohrenz, the first woman to pilot an F-14 Tomcat in the U.S. Military. Get a sneak peek of what you can expect on her website.