Managing Business Finances in a Crisis

Whether the economy is in a recession or not, businesses of all types are experiencing financial crisis. Some still have a pandemic-related drop-off in business activity and income. Many businesses are challenged by supply chain issues and labor shortages and cannot plan ahead to meet customer needs. But they all have one thing in common – times of crisis require greater attention to managing business finances. 

Planning for a crisis will not prevent the crisis from occurring. Crisis management mitigates the impact on a business when the inevitable occurs. It’s like attending to your physical health. Planning a healthy lifestyle doesn’t prevent illness or aging; however, it can reduce the duration of the illness’ severity and ease the aging process.

Owners and managers should follow three steps to manage business finances in a crisis:

  1. Assess Financial Position

Up-to-date, complete, and accurate financial recordkeeping and a monthly review of financial reports allow business owners to immediately assess overall financial positions related to liquidity and payment commitments. That information allows them to adapt quickly as soon as a crisis occurs or appears to be imminent. Immediately knowing the financial status of your business is always immensely important; even more important during, or leading up to, a crisis.

  1. Conserve Cash

During times of crisis, cash is king. Even more than usual. When business activity slows down or stops, businesses are less able to predict income and cash flow, resulting in a reduced ability to forecast how long cash balances will last. The only thing to do in a crisis is to hang onto cash to avoid missing crucial bill payments, like rent and payroll. It’s also wise to obtain a signature loan or line-of-credit in advance of impending trouble to help keep the doors open during a crisis.

  1. Scrub the Budget

Assuming that a crisis was not baked into this year’s budget – and let’s face it, that almost never happens – many businesses probably budgeted for income and expense items that no longer make sense under the circumstances. Examine each budget category for both income and expenses to identify any items will either not occur, or will increase, decrease. Expense categories may need to be added based on the crisis’ type and anticipated duration.

Recession or not, businesses experiencing a crisis require greater attention to managing business finances. Planning for a crisis will help to mitigate the impact on business finances to a steep drop-off in business activity from circumstances you have no control over, like say, a global pandemic. Following these three steps to managing business finances can reduce the duration and severity of a crisis.