SEPTEMBER NEWSLETTER 2023
How does a soft landing affect your working capital? Rising interest rates will increase your capital costs if you need to borrow money or fund growth. As a small business owner, you can get ahead of rising interest rates through smart cash management and securing financing early.
Some strategies for dealing with the rising cost of working capital include:
Managing your cash flow efficiently. Between rising interest rates
and cooling consumer spending, your sales and cash flow may be
impacted. Improving your cash flow should be a top priority.
You can do this by:
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Cutting back on discretionary spending
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reducing bulk purchasing
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Negotiating better payment terms with suppliers
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Optimizing inventory
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Maximizing your best revenue streams
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Staying on top of accounts receivable
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Delaying new capital investment if possible
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Offering customers discounts for early invoice payments
Building a cash reserve. Cash savings can help maintain your company’s cash flow, deal with emergencies, or invest in business growth during an economic downturn. Even if your business isn’t strongly impacted by a soft landing, it’s still a good idea to build cash savings so you have working capital on hand if you need it.
Optimizing business efficiency. Assess your company’s operating efficiency and look for ways to increase it. This can involve:
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Using technology and automation for key functions
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Improving loss detection and prevention
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Streamlining staffing
These actions can boost your cash flow and quickly impact your bottom line.
Getting access to working capital before a downturn. Line up access to working capital before you need it—while your business is doing well and it’s easier to get funding approval. This allows you to secure better interest rates and repayment terms before the cost of borrowing money goes up. This is the time to think about getting a line of credit or inventory financing. If you wait until a downturn happens, it will be harder to qualify for financing or you may get turned down when you need capital the most.
What a Soft Landing Means to Working Capital
A “soft landing” happens when the economy cools down gradually after a period of growth. It results from the Federal Reserve and central banks raising interest rates enough to slow an overheating economy and limit inflation but avoid a recession.
Good capital management means lower borrowing and capital costs during a soft landing. By preparing your business to deal with a gradual economic slowdown, you’re also increasing your company’s chances of being in good financial shape if a recession does happen. With good fiscal management, you can navigate a soft landing without worries.
Sources:
Accion Opportunity Fund: 5 Small Business Tips to Survive a Recession and Thrive: https://bit.ly/3KVfAug
The Global Treasurer: Rising Interest Rates and Working Capital: https://bit.ly/45QQ2WS
Investopedia: Soft Landing: https://bit.ly/3qQbeO5
Top 5 Best Ways to Protect Your Working Capital in a Market Downturn
Protecting your company’s working capital in a market downturn safeguards the longevity and financial health of your business. Many small businesses don’t have the resources or a solid plan to weather falling sales, reduced cash flow, and the drop in working capital when they need it most. About a third of small businesses only have enough cash reserves for a month or less. 15% of businesses don’t have any cash reserves at all.
Good working capital management—striking the right balance between cash flow, assets, and expenses—is crucial for small business owners. Here are 5 top ways to protect your working capital in a cooling economy and maintain your company’s financial health:
1. Make a Plan
Assess your current financial situation by reviewing your income and expenditures, including the level of debt your business carries, your cash reserves, and convertible assets. Set cash flow projections and calculate your working capital ratio. This is the difference between your assets and liabilities, divided by the assets. Would you be able to manage current debt levels and expenses if cash flow drops? The results should be an incentive to start looking for ways you can reduce expenses and increase cash flow.
2. Build a Cash Reserve
Having cash on hand to cover expenses and debt is always a good idea.
If your cash flow drops, you may need to cover expenses with savings.
You may also want funds available if your company needs to:
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move
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make major changes
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has unforeseen or emergency costs
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has the chance to expand during a downturn.
It’s a good idea to have 3-6 months of operating expenses on hand. If that much working capital isn’t available, an available line of credit is an excellent option for emergencies
3. Optimize and Manage Your AR & AP
One of the fastest ways to increase cash flow, as well as reduce capital tied up in outstanding accounts receivable (AR), is to get customers to pay invoices on time. By getting paid sooner and increasing efforts to collect outstanding accounts, you carry less debt and recognize increased income. You can also leverage accounts payable (AP) for better cash flow by negotiating with vendors to extend payment terms. Placing smaller, more frequent orders with suppliers can increase cash flow and free up working capital tied to inventory.
4. Manage and Reduce inventory
You can use inventory management methods such as just-in-time ordering, automated inventory technology or e-procurement to ensure your inventory levels are optimized. This means your business won’t be stockpiling items or have an excess of slow moving items that can tie up working capital. Plus, focussing on your best-selling products and increasing inventory turnover can boost your cash flow. If you find you have idle inventory, you can consider leveraging it to boost your available capital by obtaining an inventory loan or line of credit.
5. Secure Lower Rates for Working Capital Access
Consider having a line of credit or some other type of revolving funding access for your business. This means you won’t have to start looking for financing when interest rates are rising. This can help keep debt levels and interest payments predictable and manageable.
While strong account and inventory management are vital if the economy is cooling and sales are slowing, they’re also important when the economy is expanding. Having good working capital management allows your company to be in a strong financial position to grow and expand no matter what the economy is doing.
Sources:
Forbes: 16 practical steps that can protect a business during a recession: https://bit.ly/44E0i3U
LinkedIn: What are the best strategies to optimize working capital and liquidity?: https://bit.ly/44B04uv
Plains Capital: 4 tips for effective working capital management: https://bit.ly/47YS7lu
PNC Insights: How much cash flow should your business have?: https://bit.ly/3r3Qv9v
Small Biz Trends: Small business cash reserves: https://bit.ly/3YXHvzk
Wells Fargo: 5 ways to strengthen working capital: https://bit.ly/3L9LfYP
Your Company’s Credit Rating Was Downgraded. What Now?
So, your company credit rating was downgraded? When business credit scores dip, it means a company’s financial situation has changed for the worse and is now seen as a higher risk borrower.
The credit score decrease could be the result of a number of actions:
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Missed payments
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Failed credit applications
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The type of debt your company is holding
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The amount of debt carried in your books
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Debt to credit ratio
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Current cash flow
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Declining income
You’re probably wondering how this rating downgrade will affect your
business going forward. It might mean your company will have a more
difficult time securing funding. You could have higher interest rates on
future loans because your company is viewed with a higher potential of
default. It may be difficult to refinance existing debt. All of this could
negatively impact daily operations and the growth of your business.
When faced with a credit downgrade, business owners want to know how they can rebuild their credit. A business credit score is very similar to a consumer credit score. Making payments on time will help build up your credit profile. Rebalancing your debt to credit ratio is a big step towards negotiating those high interest rates downward. Shoring up your accounts receivables can also help bulk up your cash on hand, which shows more stability to creditors. A good business score determines not only whether you can acquire funding, but it’s a deciding factor in the terms of that loan. The better credit rating, the lower interest rate.
Remember, mistakes happen! If there are errors on your credit report, alert the credit bureau to ensure they are corrected. It’s important to keep your documentation. You might need to provide it to lenders until the error is resolved.
Other things you can do to improve your company’s credit rating include setting up credit accounts with vendors who report transactions to the credit bureau. Be sure to pay these vendors responsibly and on time. Use those business credit cards but pay them off every month. The monthly payoff shows financial stability. You’ll also want to pay attention to your credit utilization ratio (the amount of credit your business holds as opposed to how much you’re actually using). Leave some space in there to breathe. Most credit bureaus look for credit utilization of less than 30%. If you can work towards the 30%, you’ll see a positive impact to your credit score.
If the debt becomes unwieldy, it’s advisable to talk with a lender about consolidating the debt and restructuring it so your company has the ability to function, while still meeting its financial obligations. Recapitalization is also an option if you are considering a financial corporate reorganization.
In addition, pay attention to your personal credit score, making sure that it’s ship-shape. It’s important to keep personal and business finances separate, but some lenders do look at an owner’s personal score to assess funding qualifications, especially when the lender is requiring a personal guarantee.
Keep working hard, make those payments on time, and get with a financial advisor if you are considering debt consolidation. Before long your credit score will begin moving in the right direction: UP.
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