February 2009: Managing Cash in Tough Economic Times

• Feature Story: Managing Cash Flow in Tough Economic Times
• Tips for Managing Cash Flow in a Recession
• Oomph at an Event Near You
  
• New Resources: Freshbooks

Tips for Managing your Cash Flow in a Recession

Create a cash and practice conservation plan

This recession is unlike any we have faced before. Governments are doing their best to manage the situation, but no one really knows how well or how quickly their interventions will work, when the situation will stabilize, or when we can begin to look forward with the knowledge that the worst is behind us.

Before it’s all over, anything can change, with lightning speed, and seemingly unrelated developments in distant areas or sectors could end up having unexpected consequences closer to home. Therefore, times call for prudent and defensive practice management – even if you are in a profession, area or sector that have been relatively untouched. It’s not business as usual.

To create a cash and practice conservation plan:

Make a list of all monthly practice expenses and rank them in order of their importance to practice continuity and on their ability to be cut back. Set up four categories:

• Expenses that can be cut out without much of an impact.

• Expense cut backs that will have a moderate impact on the practice but will help you get through the downturn and leave you well positioned to ramp up again when the economy recovers.

• Expense cut backs that will have a major impact on the practice but that are necessary for survival in the event of a severe drop in business, or if one or more major clients halt projects mid-way or stop paying their bills.

• Critical practice expenses – cannot be cut back.

Make a list of all expected revenues month-by-month for all of 2009

• Enter revenues from work-in-progress in the month you expect to deposit the money in the bank, not when you issue the invoice.

• For smaller projects, estimate revenues based on past results, time of year and trends, and enter the amount when you expect to bank the money.

• Note for each month what the difference is between collected funds and monthly expenditures. This will give you an indication of when the balance may shift from a surplus of cash for covering expenses to a shortage. This advance awareness is invaluable because it gives you ample time to take proactive remedial action and step up sales activities and/or begin to cut back on expenses and overhead.

• If you are practicing in an area that hasn’t been too affected and looks to continue in the same manner: build up a pool of cash by cutting back on expenses that won’t have an impact on the practice and put off buying costly new equipment or launching new cash-intensive initiatives. Don’t spend any money you don’t have to – when this is all over you’ll have a great pool of cash to improve the practice, or treat you and your staff to a raise or a nifty perk.

When and what to cut back:

• If you are in a sector that is being moderately affected and you’ve experienced a slowdown, cut back on all possible expenses and look for ways to lower your overhead such as:
  
  • Renegotiating leases and payment terms on loans and with suppliers
  • Explore sharing and/or renting part of your office space to other firms who are down sizing;
  • Consider programs such as the Canadian government’s Work-Sharing Program which enables employers to reduce salary overhead without disbanding their team. Information is available at www1.servicecanada.gc.ca/eng/epb/sid/cia/grants/ws/desc_ws.shtml

• If you have been severely affected and projects have been put on hold or slowed down dramatically, cut back across the board until you arrive at a point where you can keep the practice operational without going into debt. You may end up working out of your home with one or two assistants, but this is preferable to going into debt or bankrupt. Another approach is to sell any significant assets that the practice owns. If this is an option, you still need to cut back severely or you’ll burn through the cash and end up short in a few months.

• Lastly, if you are one of the lucky firms whose main problem during economic downturns is controlling rapid growth:
  • Hire a good accountant and a good bookkeeper ASAP and have them set up cash and financial management systems in place so you are able to control expenses and maintain a balance between the money being spent to accommodate growth and client revenues.
  • Be aware that uncontrolled growth is a common reason for company failures. Lots of cash coming in doesn’t mean you’re making a profit. If you don’t have the proper systems in place to monitor revenues and expenses, the influx of cash can easily mask the fact that your expenses may have increased to the point that you are losing money instead of making a profit.

Err on the side of caution by cutting back to conserve cash, buy time and prevent going into debt. If the firm is slowing down, do not keep everything going in the hope that things will turn around in a couple of months and life will get back to normal. This is how many firms ended up bankrupt during the real estate and dot.com meltdowns.

Speed the flow of cash into the practice

The faster you can collect for work you’ve done the fewer opportunities there will be for things to go wrong…

• Send invoices out as soon as possible after doing the work
• Use time sheet tracking software to automate and speed up the calculation of project time and fee bills – one key reason firms fall behind on their billing
• Set up monthly fee instalments instead of billing by project stages that may last several months
• Stay on top of outstanding invoices and take active steps to collect as soon as terms allow. The longer you wait to collect, the bigger the chance you won’t get paid
• Establish a relationship with clients’ administrative personnel, find out what their payment cycles are and when they do their ‘check runs’ and submit your invoices in synch with their cycles to minimize processing time
• Get retainers and/or increase the amount you get paid in advance of commencing work

Slow down the flow of cash out of the practice

Hang on to cash as much and for as long as possible

• Negotiate payment terms of 30 days and more with vendors
• Pay project vendors after you’ve been paid by the client
• Use credit cards and lines of credit
• Lease instead of buying
• Be thrifty – save, reuse & recycle everything you can

Monitor client accounts closely

• If you see signs of trouble [project slow downs or holds on work that had been approved, longer time to pay bills, clients are less available or aren’t returning calls] take steps to mitigate your losses by meeting to discuss the project and alternate billing schemes such as interim or upfront payments, that will enable you to continue working without jeopardizing your client or yourself. In the event you aren’t getting any response and it’s obvious there is a problem, contact your regulatory organization to research alternatives for mitigating your losses in a way that doesn’t leave you liable for any losses your client sustains on account of the work stoppage.
• Make arrangements for clients to pay suppliers directly – don't get caught in the middle.
• Be careful taking on new clients, especially in troubled industries. Run credit checks and work only on a retainer basis. Better safe than sorry.

Attention all sole practitioners, small firm owners and number-haters: FreshBooks has developed a solution for financial record keeping that can suit you.

FreshBooks is one of the few financial record softwares that is simple enough to use, yet generates documents - including invoices, estimates and expenses - that are detailed and precise enough to present to clients. You can send invoices within seconds of creating an online account via their website: www.freshbooks.com.