In times of recession, many companies cut down on costs. But unless you’re facing bankruptcy, cutting costs may come at the cost of sacrificing future sales. For instance, to make the bottom line look better, you could always downsize R&D efforts. This may make the current quarter look more profitable. However, the lack of R&D may hurt you several years down the road, when you have no new products to introduce, and your existing products are nearing the end of their product life cycles.
To follow are several suggestions on how to improve the propspects of your company, and increas cash flow, WITHOUT sacrificing the future well being of your company.
1. Reduce Accounts Receivables
This is not the time to have leniant AR collection policies. Collecting sooner will free up your AR and increase your company’s cash flow. Offer small discounts to your debtors, to encourage them to pay sooner.
2. Reduce inventory- go lean!
Unecessary inventory can tie up the bulk of your cash flow. The worse type of inventory is work-in-progress (WIP). Ideally, you should aim to have ZERO WIP because not only does WIP tie up cash flow, but they also CANNOT be liquidated, because they are not a finished product. Finish WIP products as soon as possible. Because only finished products can be converted into cash. Secondly, order raw materials just in time, when you need them. Having raw materials sit around costs you money!
3. Invest in operations management
As a business professor of mine once said: “Operations management is not the most exciting field of business. However, it is the one area of business that you have complete control over.”
You will not be able to increase sales through operations management. However, increased operational efficiency can free up cash flow by increasing throughput and reducing inventory. The faster you can get orders out the door, the more cash you can collect.
Analyze your business process and identify bottlenecks. Make operational changes on bottlenecks only. If it’s not a bottleneck, then why should you care? (changing a non-bottleneck will not improve your throughput). Suggested reading: “The Goal” by Dr. Eliyahu M. Goldratt.
4. Take advantage of tax subsidies
The government can lend a helping hand to business, when economies go south. The problem is, not many companies take advantage of government subsidies! One example of a subsidy that is not well know, is the SR&ED program (i.e. Scientific Experimentation and Experimental Development). This tax program provides companies with an opportunity to seek a reimbursement of up to 35% of their R&D costs. This can be a huge source of cash flow for your company!
You shouldn’t be pannicking just because there is a recession. Instead, recessions are great times to investigate improved internal efficiencies. Now is the time to focus on investigating ways to improve your free cash flow.