By Jennifer Mailhes, CPA – Shareholder, Business Advisory

Due to the COVID-19 pandemic, many businesses are experiencing high levels of disruption to their operations. Governmental orders, supply-chain issues and rising commodity prices, among many other factors, are presenting unprecedented challenges for businesses of all sizes across the country.

While many businesses looked to the Paycheck Protection Program (PPP) to help stabilize their operations and temporarily improve their liquidity during the heart of the pandemic – these funds have been spent. Businesses must now find other ways to continue to improve liquidity to help decrease immediate risks and create a long-term financial opportunity to help deal with business disruptions.

Explore the ways managing your customers, vendors and inventory can help improve your liquidity and set your business up for success – long after the pandemic is gone.

1. Managing Your Customers

By successfully managing your customer accounts and relationships, businesses can easily take the first step to improve their liquidity. This will not only help in the COVID-19 era, but also your customer management in the future. We recommend:

  • Rapid Cash Collection – Reward your customers with early payment incentives or encourage ACH payments to get cash in hand quickly. Encourage and negotiate deposits or early milestone payments for things that are customized or require up-front costs.
  • Proactively Watching Accounts Receivable – Keep an eye on aging accounts receivable, follow-up with customers to resolve payment issues and even stop shipments of orders or providing services for past-due clients. Also, look for where invoices are skipped for payment as that is likely a sign of a dispute or a missed invoice, rather than waiting until they are past due.
  • Evaluating Your Customer Base – Pay attention to your key customers who order high volumes of products – be sure to prioritize in-demand products to keep them satisfied as well as attracting new clients.

2. Managing Your Vendors

Communicating with your vendors regularly not only helps to improve your business’s liquidity, but also avoids any risks in your supply chain moving forward. Your business should reassess the following regarding your vendors:

  • Evaluate Existing Vendor Relationships – Are your current vendors financially stable? If not, it may be time to identify new suppliers who offer better terms and pricing.
  • Discuss Financing Options –Ask your vendors if they can adjust your payment cycle or even extend payment terms to free-up cash. If you pay your vendors early to get a discount, continue to do this, but ask if they will extend length of time to get a discount. If you have a surplus of inventory, ask if you can return it for credit.  Also look at other payment options such as purchasing cards/credit cards to extend the payment cycle and provide other benefits.
  • Diversify Your Vendors – Using sole-source suppliers can be a supply chain risk in general, let alone during this pandemic and other supply chain disruptions. Consider diversifying your suppliers to ensure your supply chain remains uninterrupted.

 3. Manage Your Inventory

Managing your inventory successfully is imperative if you’re to be seen as a reliable company – in the midst of a pandemic or not. Easy steps to evaluate your current inventory management strategy include:

  • Rationalize Your Inventory – If your business is product-focused, perform an inventory rationalization by reviewing products that do not add value to your business anymore. Rationalization will help differentiate your items by volume, profitability and strategic value, allowing you to prioritize certain sales and eliminate others that are unprofitable, subject to shortages and require high inventory levels and long lead times.
  • Identify Obsolete Items – Slow-moving products take up space for otherwise valuable products; liquidate these items by reducing their price for a quick sale.

Keep Moving Forward

As companies have learned their unique critical risks the hard way over the last year, it has been an eye-opening opportunity to understand the weak spots of daily operations. Improving your business’s liquidity allows you to improve your financial situation relatively quickly, as well as poise yourself for operational success that will last for years to come. By focusing on these three areas of improvement, companies can reassess their business models and emerge ready for success for other challenging times. If you have questions about your business’s liquidity, contact the dedicated CPAs and advisors at Doeren Mayhew today.