Financial Best Practices for Times of Economic Uncertainty

As the initial frenzy of the application, documentation and funding phases for the Paycheck Protection Program (PPP) fades into the background, businesses and bankers alike are looking ahead to what’s next.  

For many that means confirming that PPP funds are being used appropriately and as efficiently as possible. As a bank, it’s important for our team to help clients stay on top of the most current guidelines and to provide supporting documentation to ensure everyone is knowledgeable. Our dedicated team is responsible for helping clients apply for loan forgiveness, with the goal of maximum forgiveness in a timely manner. Once this phase is behind us, it will be time to focus on the big picture moving forward.  

While the PPP loans and other SBA funding options have provided a bridge for many small businesses to get through the initial economic impact of the COVID-19 pandemic, there is still a lot of uncertainty. Who knows what it will look like in 90 days? It’s likely to be a tough road and the economy is going to look a lot different.  

Businesses will need to determine their new break-even point and then plan for a variety of contingencies based on certain assumptions. To do so effectively, we are recommending clients implement several financial best practices to achieve greater insight and control over the financial health of their business. 

Cash is King 

In times of economic uncertainty, it is more important than ever to manage your business’s liquidity effectively. Consider if revenue slows, how much cash do you have on hand to get you through? And for how long? Build up cash reserves as best you can. As a business owner, assess if you have additional capital you can inject into the business. This is a time where liquidity is going to be imperative for long-term success.  

Monitor Key Relationships 

Be mindful of how the pandemic is affecting your partners, suppliers and even competitors. Are your vendors having trouble sourcing materials? What are your partners noticing in other parts of your industry? Are your competitors holding steady? Or have they pivoted to serve a different industry with greater demand? There is value in monitoring relationships that are key to your success. 

Now is also the time to watch your credit like a hawk. Are your customers taking longer to pay? Or unable to pay? Be acutely aware of your accounts receivable aging and mindful of the terms you are extending to new and existing customers alike. Are your vendors paying their bills on time? If not, that could signal trouble on the horizon as well.  

According to Lori Frank, President and CEO of Argos Risk, slower payments may indicate your customers are conserving cash, while an increasing number or credit inquiries could be a sign the business is looking for money. 

If you are extending new terms, it’s crucial to develop a system for assessing credit risk. For instance, if you land a new customer, how do you determine if they are a credit risk? You can do a bank reference or request other referrals. But when watching your cash and credit more closely, the more information you have access to the better. 

“Don’t just look at where they are today because that’s a snapshot. Look at the trend for the last six months. Are they trending down? Are they trending up? Or are they flat? Trending is really the number one thing to look at,” said Frank. “It’s also important to look at the health of industry they are associated with as well as recent news.”  

Watch for Opportunities 

Even in uncertain economic times, it’s not all doom and gloom. While some companies may be scaling back or more vulnerable, there are opportunities for growth if the risk is appropriate. Businesses with sound management and good fundamentals may be able to increase market share through acquisition of a company that’s in trouble. 

Now is also good time to take a closer look at your own processes and systems with an eye toward operational excellence. Could automating certain functions or implementing digital solutions provide the bandwidth necessary to focus on new growth areas? Could incorporating lean strategies (i.e. 5S, value stream mapping, mistake proofing, etc.) eliminate waste and reduce costs? Doing so now will likely position your business to withstand longer periods of slow growth and deliver larger returns once revenues bounce back to normal and human capital becomes scarce again.  

Keep Timely and Accurate Financial Information 

Maintaining an accurate set of financials for your business should always be a best practice. But quick access to timely and accurate financial information is even more critical in times of economic doubt. Keeping meticulous books makes it possible to be nimble when addressing capital needs or working with banks. Having a firm handle on your financial situation also makes it possible to be responsive or even get out in front of potential problems when they arise. Your banker and other financial advisors will thank you.  

Create a 13-Week Cash Flow Projection 

Now more than ever, you should be painstakingly tracking your business’s cash flow. Setting up a 13-week rolling cash flow projection, which shows cash in and cash out, which is updated every week is an immensely valuable tool. It can be as rudimentary or as robust as you like. Its purpose is to forecast your liquidity for the next three months, so you have time to get out in front of any issues or opportunities. It also provides more transparency and visibility when working with your lender.  

Utilize Your Trusted Advisors and Peer Groups 

Whether it’s the state of the economy, your business’s financial health, or potential opportunities, now is a great time to work with outside advisors to gain additional insight. This could mean something as simple as a conversation with your banker or could include participating in an industry forum or roundtable.  

Increasingly, many businesses are turning to fractional support for areas such as finance, accounting, human resources and even marketing. In some cases, businesses are finding the outside fractional model makes a lot of sense to provide much needed high-level support while managing costs moving forward.  

Stay Close to Your Banker 

At Fidelity Bank, we’ve always believed in the power of relationship banking. In times of economic uncertainty, having a good relationship with your banker will certainly give you a leg up. Working with a bank that knows you, knows your business, and knows your industry is important. It is more important than ever to have direct access a decision-maker.  

None of us knows how these next few months are going to go. But it seems logical to assume that the economy is going to be tough for a while. Perhaps for some industries more than others. Industries will be tested. Businesses will be tested. Leaders will be tested. We may have some tough conversations and tough decisions ahead of us.  

Together with a strong banker relationship, implementing the best practices outlined above, will put your business in a better position to plan for whatever opportunities or challenges come your way. No matter what, we are all going to need to work together to manage the outcome of this pandemic for a long time to come. If we haven’t had the chance to meet with you yet, I’d like to extend an invitation on behalf of the team here at Fidelity Bank, our team is here to help. 

About the Author

Jeff Campbell is a senior vice president and commercial lender at Fidelity Bank. Jeff specializes in working with entrepreneurial, closely-held and family-owned businesses, helping to find the right banking solutions that fit their unique needs from working capital to M&A to ESOP transactions. Jeff aims to genuinely build relationships with his clients, watching their businesses evolve over time. He is known for proactively working with clients to address their business challenges and opportunities and being a trusted resource and advisor.

Jeff joined the team as a commercial credit analyst after graduating from Hamline University with a degree in Economics and Business Management in 2001.