ON CASH FLOW || 3 Questions Business Owners Must Ask to Weather the Recession

There’s no better time to talk about cash flow than right now.

We just witnessed the collapse of two banks, the widely reported failure of Silicon Valley Bank and the ensuing Signature Bank.

Both were caught in a sudden squeeze with their cash flow and needed to liquidate—fast. Silicon Valley Bank sold bonds at a discount and looked to offload shares when the rapid increase in interest rates cratered their investments in bonds. Once depositors got wind of the enormous losses sustained by the bank, they hurried to withdraw their money. This meant that the banks’ once-healthy deposits were depleted just as quickly as they had expanded in 2021.

While they say hindsight is 20/20, one lesson entrepreneurs and business owners usually learn the hard way is the importance of cash flow.

Humans are funny creatures. When times are good, we believe it’ll last forever until it doesn’t. This happened when we could borrow money for nearly nothing when rates were comparable to or at zero percent. Most businesses funded growth on loans and lines of credit, choosing to grow as fast as possible and take advantage of the (almost) free money available to them.

With the interest rate leaps in the past 12 months, businesses have been dealing with unexpected cash outflows. A debt they took out at the end of 2021 may now cost them 18 times as much to service. The policy interest rate was 0.25% back in March 2022 and now sits at 4.25% as of March 8th, 2023—18 times what it was a year ago.

If you’re a business owner, what cash flow-related questions should you ask now to ensure you can stay afloat through the next year or two of difficult times? While they say rates are coming down, we shouldn’t expect them to tumble back to the original 0.25%.

View fullsize

Every business owner is feeling the squeeze with higher costs of capital and business inputs, how will your business weather the recession?

Here are the three questions you must ask to face some hard truths for your business's survival.

1. How much runway do you have? If you continue with your current monthly expenses, how long can you stay in business? This gives you a deadline to get real and deal with your finances—what can you cut? Your business may have to hit rock bottom before the economy allows it to rebound. If you discover that your business can only survive for three months, you may have to take much more drastic measures and fast.

2. Can you get cheaper debt? Less, not MORE debt, is the answer. Getting into more debt to extend the operating runway for your business isn’t the way; the cause of your current cash flow crunch is likely because of high interest rates, so why would you want to exacerbate the problem? Instead, consider whether you can consolidate or restructure your business debts to pay a lower interest rate. If you’ve been funding your business expenses with credit cards, it’s time to consult your bank for lower-cost alternatives. If you’ve been in business for a few years and are in good standing, see if you can apply for a line of credit, usually available at a lower rate than credit cards.

3. How will you use the two levers of cash flow? It's as simple as inflow and outflow, revenue and expenses. Given the state of the slower economy, making more revenue to service the outflow and debt would be unlikely. This is why you're left with the second lever--cutting expenses. Depending on the type of business you run, your expenses structure will be different. If you run a product-based business, inventory and logistics likely make up a sizeable percentage of your costs. If you run a service-based business, human capital could make up as much as 50 percent of your monthly expenses. When a product-based business needs to cut expenses, it sells off the inventory instead of paying for warehouse and storage costs. When a service-based business needs to cut expenses they reduce staffing or go on hiring freezes.

The state of the economy isn't a problem that will simply go away if you give it time. If your business had been buoyed by the booming economy in 2021, you would have felt the pain that 2022 brought twice as hard. Don't be overly optimistic about the future, and hope that everything will work out. You need to be the one in the driver's seat, not your luck. Give yourself a reality check today by answering these three questions.