Business owners who worked tirelessly to survive the impacts of the pandemic are now facing rising interest rates and ongoing inflation, which continue to put stress on their businesses.

As we wade through these challenges, businesses may need to prepare for the continuation of high rates, the potential of a larger economic downturn or possibly a recession as the Fed continues to combat inflation.

Below are some key financial considerations for businesses as we operate in a volatile economic climate.

Determine and assess your cash flow

To know where to go, you have to know where you are. Business profits are not the same as cash flow, so don’t look to your profit/loss statements to determine if you have enough cash to cover your business operations. Dig into the details of your business’s financial statements to see what you have in cash reserves each month, and what your income/payment cycle looks like.

There are three types of cash flow for business owners:

  • Operating cash flow covers net income earned from normal business operations.
  • Investing cash flow includes net cash generated from a company’s investment-related activities like equipment or property, or the sale of assets.
  • Financing cash flow covers the flow of money between a business and investors or creditors.

There are different ways to calculate your cash flow that you can discuss with your banker. A direct calculation is as it sounds and factors in the transactions during the specified time. An indirect calculation occurs when you include accrual accounting for factors like depreciation of an asset over time.

Your cash flow projections should be able to tell you the cash you have right now, and a projection for what your cash will likely look like in six months. If you’re in an industry with long payment cycles, like freight or leasing companies, you will likely need to forecast more aggressively to truly see what your business cash flow and income amount to.

Top cash flow issues for businesses

A number of things can affect cash flow, from fewer sales or growing too fast, to not strategically leveraging financing and corporate credit cards. When it comes to seasonal or small businesses, situations like too much inventory at certain points of the year are common and can be planned for ahead of time.

In 2024, one of the biggest cash flow issues is more expensive borrowing. According to results from the May 2024 survey report‡ of the National Federation of Independent Businesses (NFIB), 6% of business owners reported that financing was their top problem in May, up two points from April. The last time financing was this high and was a top business problem was in June 2010.

In the same NFIB report, 58% of owners reported capital outlays or investments in assets in the last six months, up two points from April. Of those making expenditures, 40% reported spending on new equipment, 25% acquired vehicles and 16% improved or expanded facilities. Additionally, 11% spent money on new fixtures and furniture and 6% acquired new buildings or land for expansion.

In times of economic stress, adjusting expenses and processes to generate and protect business cash flow is critical. These data points tell us that while money is more expensive right now, investments still need to be made to continue business profitability, which is why it’s more important than ever to protect and analyze your cash flow.

Cash flow management

Protect your cash and liquidity

With talks of a potential recession on the horizon, uncertainty rules the day, which means it’s critical to maintain enough cash to handle your day-to-day operations. Defending your cash may be just as important as generating it as we look at a potentially longer recovery timeline.

Some strategies to consider include:

  • Pausing some larger or long-term business plans that involve taking on more debt. Granted, some debt may be necessary to adapt your business to new challenges. But it may not be the right time to expand, add locations, update equipment, etc. if you don’t have a healthy cash reserve to lean on.
  • Tightening your accounts receivables processes to clean up your payment pipeline. This could include reducing or halting consumer credit extension programs, creating and applying standard late payment fees and ensuring invoices are accurate from the get-go.
  • Innovating for digital payment acceptance to access payments faster. If your business cash flow still relies on paper—paper invoices, paper checks, paper anything—it could be significantly slowing your payment cycle.

Analyze spending needs

Budget cuts. No one likes them, but nearly all businesses need to implement them at some point. If you haven’t yet revisited your budget, you are overdue in facing the music. What may have looked like a perfectly reasonable allocation in December 2023 is likely no longer on the docket for the year. Conversely, funds you may have set aside for a new project may have been absorbed into expenses related to market changes, economic pressures and global events.

One tip to consider: don’t just start slashing willy-nilly. Being strategic about budget cuts now can help your business recover when the market picks back up.

  • Review costs associated with the inflationary environment. Are there opportunities to scale back or be more efficient?
  • Analyze fixed expenses (are they really “fixed”?). For example, look at insurance policies, subscriptions, vendor services and retainers and start conversations to trim where possible.
  • Innovate your marketing techniques. A knee-jerk reaction could be to cut large funds from marketing, but that could hamstring you later. Instead, consider ways to cut costs by optimizing digital and social opportunities during this time of digital living and shopping.

Consider ways to generate cash

Once you have a handle on your current business cash flow, you can turn your eye to generating more income. While it’s a tough market for many industries, it’s important to stay nimble, highly aware of customer needs and strategic in your decisions.

Even if your business is struggling to capture new clients, there may be some ways to optimize sales and access cash.

  • Consider adapting sales processes for a new consumer. Your client audience is likely facing just as many challenges as your business in the current environment. It may be helpful to employ some of the business tactics used after the 2008 crisis, like creating or extending return policies and satisfaction guarantees to help purchase-worried customers feel more confident.
  • Rethink pricing. It may make sense to review your pricing structures—whether it’s to increase, decrease or restructure. For instance, some companies have shifted to a subscription model to help produce fixed monthly income while enticing clients with a fixed monthly expense.
  • Consider selling or refinancing your business assets. While it may not be the most enjoyable option, selling unnecessary equipment or other assets could help boost liquidity.

As you take stock of your liquidity and consider strategies for the remainder of 2024, now is the time to be in touch with your business banker. Your banker can help you plan for managing market uncertainty and build contingency plans for liquidity, debt management, accounts receivable tactics and more.

If you are interested in learning more about how UMB can help your business as a financial partner, visit our website.

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