Best Practices in a Down Economy
Updated: Jul 17, 2020
Keeping a handle on cash flow and burn, and make more of your costs variable. If you aren’t monitoring these metrics, let's talk about how we can help you.
This was first written prior to us needing to “social distance” and work remotely at Charles River CFO. Many of these points are more important than ever. Happy to discuss further if you, as CEO, need to do some blue-sky thinking. Whether it’s a down economy, volatility in your market or just prudently managing your business, there are a few best practices every entrepreneur and business owner should consider.
Keeping a handle on cash flow and burn, and make more of your costs variable. Let’s get at it. If you aren’t watching these, then you better.
Cash flow, it’s a simple concept, but one that eludes many CEOs. What cash is coming in the door? When and what strings are attached? Is it cash that requires future services or unfettered? Can you reasonably project your next 6 and twelve months? Typically, this is more of a monthly exercise, but when a down economy strikes or you find yourself in a volatile market, this can be a weekly or even daily exercise, because decisions made today may be impacted by your access to cash.
Cash burn is also a simple concept, how fast is that cash going out the door? As the CEO, if you don’t know it, you are vulnerable. Every day you are making decisions both actively and passively that impact how fast your cash is going out the door. Do you have your cash burn charted out? Do you map your actual to your predicted cash outflow? Every time you make a significant decision, update your burn, which could be daily or weekly.
Once you have a handle on what is coming and going with your cash, your next move is to manage that process. When you look at your fixed costs, what can you move to variable? Many businesses take advantage of outsourcing back-office functions like accounting, human resources, and IT. When cash outflow is tight, you can slow the outflow of cash by using these services just-in-time, versus fully loaded employees. With limited cash resources, you decide whether to hire for your top-end strategic needs or hire to cover your basic needs and miss out on key strategic resources. Using an outsourced firm like Charles River CFO (CRCFO), you can tap into the talent of the individuals assigned to you as well as that of the entire CRCFO firm. You manage your bottom line without forgoing talent.
And don’t forget that in addition to outsourcing back-office functions, there are other costs that can be flipped from fixed to variable. Think of rent and fixed assets. Coworking offices give you access to both space and fixed assets you only need sporadically. Why pay for a conference room that you only need episodically. Having the ability for employees to work virtually creates less need for physical space.
To better manage your burn of cash, best practices say not to keep an excess of inventory on hand. That includes raw materials. If cash is indeed king, buy it when you need it, make it when you have the orders. The just-in-time inventory practice takes discipline, and careful management, it does, however, result in better cash management.
So, while it’s time to focus, take that deep breath. Put these steps into place, your business will be better for it.
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We are smart, nimble, and flexible. If you would like to discuss how Charles River CFO can assist your company with part-time CFO and accounting services, please contact us at (781) 431-0420 or send us an email.