When a recession comes calling, many business owners don’t know how to decide to weather the storm. They don’t know where to start or what to do leaving them confused, worried, and sometimes paralyzed. Financial security for your business shouldn’t be so hard to achieve during times of economic uncertainty.
Recently, we talked about how to create a scorecard (if you don’t have one already) and look for trends. Now we’re going to talk about the importance of cutting expenses and stockpiling cash.
In the Great Recession, I worked with a retailer who owned multiple stores. He owned the real estate for all 5 stores, in addition to the inventory in each. We did an analysis of his stores and found that only 2 out of 5 were profitable. So what did we do? We started cutting expenses and stockpiling cash. The biggest expenses were the mortgage payments on the 3 unprofitable locations, so we started there. It took us almost 3 years, but we sold off all 3 locations.
At the same time, we started liquidating the inventory from those 3 locations and used that inventory, in part, to keep adequate inventory for the other two locations and the rest went into the bank account. Third, we looked at the operating expenses of the locations and decided to cut expenses. The largest controllable expense in most businesses is salaries. So, while we did have layoffs, the cash from liquidating the real estate and inventory and the expense cuts was enough to retire all the bank debt. Three years later, this owner had two profitable locations that were debt free and generating significant cash flow.
So once we’ve cut expenses and are generating profit, how do we stockpile cash? Simply stated, we must increase our cash inflows (collections, borrow, or put in capital) and decrease our outflows (distributions, equipment purchases, vendors, or operating expenses) in a way that our cash balance is increasing over time. The financial statement to use to measure this is our cash flow statement (QuickBooks calls it “The Statement of Cash Flows”). For any month, it will show where our cash came from and where it went, and it shows us if cash increased or decreased. It is the least used and least understood financial statement of them all. But it’s critical for managing through a recession.
Don’t take the bait of putting your head in the sand if you see a recession coming. Have a plan for cutting expenses and stockpiling cash. Managing through a recession with your cash flow statement takes you from financial confusion to financial clarity.
