From the Maine SBDC website
By John Entwistle

From a business owner’s perspective, whether the economy is in a recession or not is somewhat immaterial. Managing a small business can be difficult even during the best of times. In the midst of an economic downturn, however, the activity becomes essential and doing it well is often the determining factor between staying afloat and going under. Whether good times or bad, businesses often find themselves in the middle of a cash crunch and need to know how to steer the business back to ‘safe harbor’.

The principles of good cash management are elementary, yet are often overlooked during smooth sailing. Regularly increasing revenues have a way of masking poor cash management practices and growing underlying problems.

Surviving a Downturn FAQs

How can I improve my cash flow position?
To Improve your cash flow position, there are several steps you can systematically use in the sequence presented below.

Where do I begin?

An essential first step is to ensure you have accurate and timely information. Now is the time to make sure that all entries have been made properly into your bookkeeping system and that reports (profit and loss statement, balance sheet, etc.) accurately reflect the businesses’ current fiscal condition. Gather all information that you might need to make appropriate decisions that may include: historical financials, sales by month by product line/service activity, list of employees and wages, accounts receivable, accounts payable, schedule of all loans, asset list with market value, etc.

How do I set cash flow goals that I am likely to achieve?

Develop minimum profitability and cash flow goals for the next twelve months. During regular times, that means including an appropriate level of compensation for the owner and an appropriate return on their investment (25% +/- 5%). During difficult times, that may mean just breaking even and keeping the doors open. Develop a sales goal, by month, for all product lines and/or service activities. Ensure that they are adjusted for seasonality and business cycle. A helpful exercise would be to first establish an estimate with a 50% likelihood of attainment. Then create, and use, a second estimate that you are 80% confident you will achieve. This exercise is useful in making sure you’re using a conservative estimate.

How do I use these numbers to project cash flow?

Use the more conservative estimates (See the second estimate you created in the step above.) to populate a cash flow statement. Incorporate direct cost factors and estimates for fixed expenses based on your best knowledge of future costs. Begin to make judicious decisions about expenses that can be trimmed (look at insurance costs, utilities, professional fees, maintenance fees, travel and entertainment, fringe benefits, etc.) but be realistic about what expenses can be reduced and which are necessary.

What do I do if I don’t like the revised cash flow numbers that I develop?
Calculate your cash flow and compare to the cash flow goals established in the step above. If your head is above water, fine. If, however, there is a shortfall, it’s time to sharpen your pencil. Take another look again at the cash flow projection with an eye toward possibly increasing prices, reducing expenses further, or making cuts. It may be time to look at what product lines can be eliminated or whether it is time for lay-offs.

Can I squeeze additional cash out of my business?

Once you have completed the steps described above, is time to look at balance sheet items to see where additional cash might be generated. Are there inventory items that might be sold off? Make appropriate calls on customers to collect accounts receivable. Talk with vendors to extend accounts payable balances. Now is the time to also talk with the banker and landlord to make sure they are aware of your predicament and determine what allowances they can make. Additionally, determine whether there are assets that can be sold off, or sold off and leased back. Finally, it may be time to look into any avenues available for raising equity (family, friends, or friends of family).

How can I be sure I can keep my cash flow plans on track?

Once a path to a healthy cash flow situation has been established, it’s time to implement the plan. As plans are implemented, it is essential that you establish a method to monitor your cash flow health to keep you solvent in the future. Track activity and compare it to your budgeted estimates, compare it to last year’s numbers. Look for variances and make sure you understand their cause. Develop your own set of metrics (cost of goods sold, inventory turnover, labor cost) that can be easily monitored to provide you with a gauge of fiscal health. Communicate these measures to others in the company to ensure their buy-in to the maintenance effort.

John Entwistle is a Certified Senior Business Counselor and Center Director for the Maine SBDC Service Center in Portland which administrates the SBDC program in Cumberland and York counties. Mr. Entwistle also serves as Assistant State Director for the state-wide Maine SBDC program working on information technology issues, the New England Products Trade Show, the Rural Micro-enterprise Assistance Program, and other special projects. Entwistle’s career has included business ownership, business counseling, as well as, significant experience in writing and speaking on small business issues. John has owned and operated businesses in both the foodservice and small boat-building sectors.

Entwistle’s articles on small business job creation and the benefits of the Maine SBDC program have been published in a variety of journals and magazines including Downeast Magazine and Maine Business Indicators. He served as a reviewer for the highly acclaimed guide to entrepreneurship, The Real World Entrepreneur Field Guide, published in 1999