While we can’t predict the future, we can learn lessons from history: what actions successful companies take during and after the downswing.
The economy keeps facing ups and downs frequently. Currently, the Indian economy is on the verge of a recession and financial knowledge and understanding becomes even more vital during these times. Business people should be able to identify the symptoms of the upcoming financial crisis and solve them without causing a huge loss to their business.
In most cases, businesses exposed to the impacts of an economic downturn will first experience changes in their daily financial activity, which will affect their sales figures and revenue. In turn, this decline in revenue will affect the financial position of the business in a number of ways, like profitability and cash flow.
You can manage your business’s finances during an economic downturn by strengthening your financial position and ensuring that your business is ready and able to embrace opportunities.
Monitoring your business
Frequently monitor the economic environment and understand how any changes may affect your business. This will provide you with ways to arm yourself in advance. Some ups and downs may not affect you, but in the long run, it is better to be prepared.
Make sure you have up-to-date financial information about your business and the industry your business belongs to. This may help you in finding ways to restructure your plans.
Managing cash flow
Managing your cash flow helps keep your business financially steady. A profitable business can still fail because of a shortage of cash, so managing your cash is important. Especially for MSMEs, cash flow management plays a vital role during not only downswing, but also on a regular basis.
Managing your cash flow includes:
- Managing your debtors and creditors to make sure your business has enough cash to pay bills, wages, taxes and other expenses
- Estimating your receivables, inventory, business expenses and available working capital
- Studying your day-to-day expenses – considering what can be reduced, rationalized or cancelled
- Negotiating with your suppliers to get a better price and better credit terms
- Considering shortening the period between customers ordering and paying
- Sending invoices quickly and offering discounts for early payment and asking for work-in-progress instalments
- Exploring ways to get more out of your assets
When stock is well-managed and balanced, it generates profit. Successful stock management requires a balance between the costs and the benefits of the stock. The costs include the money tied up in stock as well as storage and insurance. The benefits include having adequate stock on hand to meet client demand.
Good stock management is knowing what stock to buy when and how much. This directly impacts your cash flow management and profitability.
Repricing products and services
Setting the right price for your products or services helps you stay financially steady as well as maintain a good relationship with your customers. Effective and thoughtful pricing can help you avoid the serious financial problems that may occur if your prices are too high or low in the time of crisis.
Identifying unprofitable products and customers
When resources are limited, it is extremely important to consider the profitability of individual customers and products. Profitable customers and products need and deserve investment, while unprofitable customers and products require detailed analysis to determine whether or not to continue with them. It may not be the best decision to have available resources tied up in delivering products or services at negligible profit unless a rapid improvement can be achieved. A thorough analysis is required to ensure that all direct and indirect costs of a product or service are considered. When this is done, corrective action for non-performing products or customers can be taken. If you are facing a downfall, once you have identified your profitable products and customers, it is best to invest your time and resources in them rather than focussing on all of your product range.
Managing working capital effectively
We all know ‘cash is king’. Entrepreneurs should be focused on minimizing investment in working capital. Effective working capital management will limit reliance on lenders, contain financing costs, and reduce the risk of loss during the hard times.
Electronica Finance Ltd is a finance partner that you can trust if you find your business in distress. EFL offers working capital demand loan that helps you meet your regular working capital needs in the time of crisis. It can be used for managing day-to-day business expenses to suit your business requirements. You can get loan amount up to Rs 50 lakh with easy and 24-hour* approval. Interest rates are flexible and based on customer’s requirements. You even save interest cost because you need to pay interest only on the amount used. Other available loan options are business loan and loan against property. EFL is By Your Side to balance and strengthen your financial position in every downturn.