The key to managing any kind of disruption, whether it’s the result of an individual event, or more general economic pressure, is maintaining sufficient working capital to mitigate impacts on operations. This gives businesses time to reassess and develop appropriate strategies to deal with changing conditions.
Currently, Australian businesses are facing their first recession in 27 years, brought on by natural disasters, the coronavirus pandemic, and the subsequent global economic impacts. Because of its close trade ties to China and other strongly affected countries, the OECD cited Australia specifically as one of the countries due to be hit hardest by the economic effects of the coronavirus. With global stock markets tumbling alongside oil and copper prices—both of which serve as important economic indicators—experts have little doubt that the economy will contract in both the first and second quarters of this year.
As pressures on Australian businesses increase, it’s more important than ever for business leaders to prepare their finances for disruptions. By optimising their working capital position now, companies can make themselves more resilient, and improve their ability to respond to changes strategically.
Timing is important
While the Australian economy has been under pressure for some time, it hasn’t slipped into recession in nearly 3 decades. This means that most business leaders will be operating in a contracting economy for the first time in their entire careers. In order to succeed in conditions that are not only adverse but also unfamiliar, businesses need to ensure that they’re prepared to manage whatever comes their way. To do that, they need to develop cash flow solutions in advance.
At this point, many businesses have already felt some economic impact. Going forward, though, foresight will be key in determining how well particular businesses come out of the recession. Those who can strengthen their working capital position before a recession will inherently be less vulnerable to disruptions. They’ll be able to manage disruptions more easily, and can effectively come up with the time and resources to develop and execute strategies to protect themselves, and to attempt to drive growth — even when times are bad.
Reduce payments and cut operating costs
The RBA reduced interest rates to an all-time low at the beginning of March. For businesses, it’s an excellent time to refinance loans to reduce monthly payments, freeing up more liquidity in the coming months. Besides that, the threat of a recession should galvanize business owners to trim the fat off their operations. That means cutting unprofitable projects and products, as well as redundant staff.
It’s important to do this sooner rather than later. Waiting until after a budget shortfall has already occurred to make changes forces businesses to make changes under pressure, often making deeper and more disruptive cuts than would otherwise be necessary. By doing so earlier, businesses can reduce costs sooner, freeing up funds sooner in anticipation of potential budget issues.
Eliminate cash flow inefficiencies
Even when times are good, it’s impossible to avoid all cash flow interruptions. When these occur, businesses need short term financing tools that will allow them to avoid any potential interruptions to their operations. Invoice and supply chain finance are ideal for this, because they allow businesses to access funds on short notice without taking on any new liabilities. Not only does this solve budget issues quickly, it protects their debt-to-equity ratio, making it easier to access traditional long-term financing later.
Supply chain finance
Supply chain finance is a way to pay suppliers while also deferring outgoing payments. Businesses can do this by working with a financier who will pay suppliers on their behalf when an invoice comes due. They then make their own payment to the financier at a later date, up to 90 days after the original invoice date. This gives businesses more time to come up with the funds they need, and allows them to deploy existing working capital to manage other pressing needs.
When additional working capital is needed, businesses can turn to invoice finance. This allows them to exchange an existing invoice for cash. On receipt of the invoice, the financier issues the majority of its value up front. Then, once the customer pays the financier, the remaining funds are paid out. This allows the business to access cash on very short notice, typically in a matter of hours.
Short term financing tools like these allow businesses to quickly deal with unexpected problems that might have otherwise interrupted operations. By ensuring that this doesn’t happen, business leaders buy themselves the time they need to respond to the changing requirements of their companies, and to make adjustments to their long term growth strategies.