Surviving Illiquidity

If your business is in really dire straits, cut back on employee benefits, implement a hiring freeze, and move to compensation with bonuses or company stock instead of salary increases. If you explain to your employees that this is a short-term situation necessary to save the company—and their jobs—most will go along with you.

Now is not the time to launch a new marketing campaign, start a major research and development project, or hire a direct sales force. Learn to make do with what you’ve got until your business has stabilized.

Finally, get more aggressive in managing your balance sheet. Focus on improving receivables collections and stretching out payables. Get as many customers as possible to pay within 30 days. Segment your customers according to credit ratings. Avoid the higher-risk customers and evaluate the trade-off of revenues from marginal sales. You may even want to consider a tiered billing program that offers a 5 to 10 percent discount for early payment.

On the flip side of the cash- management coin, hold onto your cash as long as possible when it comes to paying bills. Renegotiate terms with vendors and ask for 45- to 60-day (or even 90-day) terms. You won’t be able to do this with everyone without damaging relationships or incurring late penalties, but the idea is that if you can pay your bills in 90 days and collect receivables in 30 days, you will generate two months of operating cash.

Prepare For Recovery

All these cash-focused activities, led by an executive team that is creating a sense of urgency and priority, will spread a fever of preparation and confidence among the employees at your company. Belief in the prospects for recovery is vital to survival, and it can become a self-fulfilling prophecy. Inaction is the worst reaction to an uncertain future. Even the wrong strategy executed properly can end up being more of a success than doing nothing.

The silver lining of economic downturns is the financial discipline that results. It’s always good business to squeeze out internally generated cash flow, but a difficult economy makes it essential.

For businesses that do not manage cash generation, economic downturns become a time of gut-wrenching change for the worse.

For those who keep their eyes on the cash generation ball, these times are more likely to become a period of metamorphosis. The strengthened businesses that result are a whole lot prettier than the ugly caterpillars of the past.