All business owners understand the repetitive cycle of peaks and valleys. Yet, truly successful businesses anticipate the valleys before they fully hit and see new opportunities when peaks become readily available. It’s our job as finance partners to our clients to help them read the tea leaves. Here’s the latest: we are currently advising entrepreneurs and small businesses to anticipate cash flow issues that may arise from current US monetary policies.
The ability to maximize cash flow is important for any business. It’s strategically wise for businesses to have funds readily available to them, particularly when a slow down in cash that impacts operations arises. Although debt is not always our friend, it is always advisable to have free funds at your disposal in times when operating cash flow of funds might be slower than usual.
For companies who do not have a line of credit available to them, we are advising them to strongly consider opening one. For companies that do have a line of credit or loan agreement in place, make sure you review all of the terms and financial covenants that are part of the agreement.
Strong financial forecasting is important, and if you have a loan agreement with minimum requirements such as loan coverage ratios or minimum amounts of EBITDA or profitability, you should be taking a look at your forecasted results. Make sure to stress test your financial assumptions in both your current year budget and your current forecast. What would happen if your key supplier doubled prices? What would happen to your top three customers if you decide to increase their prices by 30-50%?
No one likes to look at those scenarios; but, the best prepared entrepreneurs are the ones that consider the widest and least likely possibilities in their forecasts.
So what are next steps in light of the current economic climate?
Take-away: Being a knowledgeable entrepreneur and small business owner requires anticipating negative events in your business and industry. For assistance analyzing your initial options in a rapidly changing market environment, contact Brian or Scott at email@example.com.
Co-founders & Managing Partners