How to Optimize Cash Flow Forecasting for a Credit Crunch

As SMBs well know, cash flow can make or break a company, fueling everything from payroll and supplier payments to operations and investments. While knowing your current cash flow and future forecasts is always critical, it is especially imperative during a credit crunch when funding options are limited and loans more costly.

Unfortunately, that’s where we seem to be heading. Against the backdrop of rising interest rates and the Silicon Valley Bank failure, Federal Reserve surveys and news sources are pointing to a looming credit crisis.  According to the Federal Reserve survey of Senior Loan Officers conducted in April, banks expect to raise the qualifications for loans, making them harder to secure due to increasing funding costs, liquidity concerns and reduced risk tolerance, among other factors.  Some sources like Reuters believe the credit crunch is already underway, with smaller banks already starting to reduce lending and raise rates.

Why Tightening Credit Impacts SMBs

SMBs typically run lean, and with less liquidity and fewer financing options than larger companies, they are usually hit the hardest during a credit crunch. According to the Biz2Credit Small Business Lending Index released in February, approval of small business loans has been significantly decreasing at banks of all sizes. This is particularly concerning since most firms (62%) are now borrowing to meet operational expenses, such as rent, payroll and inventory according to the Federal Reserve survey – in other words, to keep their doors open. In contrast, the top reason (56%) for loan applications in 2019 was to fund expansion and other business opportunities.

5 Strategies to Minimize The Impact of Tightening Credit

While you can’t control larger economic trends, there are best practices you can implement to weather a tough credit environment. Here are five strategies that savvy SMBs rely on:

1. Know where you stand

To accurately assess your cash flow and credit needs, you first need real-time visibility into AR and AP. The only way to get an accurate view of your assets and liabilities is to automate these processes, ensuring that you capture every single invoice and payment, and know where it is in the process at all times. 

 

2. Forecast your needs

Once you know how much cash you have on hand, you can use automation to more accurately forecast how long it will last, instead of relying on error-prone and time-consuming manual methods. By using real-time AP and AR data, you can use a tool like Centime to aggregate a view of cash across all accounts, create a rolling cash flow covering a few months, and drill down into projected cash inflows and outflows to gain insights.

By keeping track of KPIs, such as cash flow, burn and runway, along with insights into current and future cash assets and liabilities, you can effectively plan AR and collections as well as expenses and supplier payments. This visibility and planning capability helps predict and minimize the impact of late payments, unplanned expenses, or other surprises. Additionally, you can customize forecasts to adapt to ever-changing business needs and goals.

3. Improve financial operations to optimize working capital

In addition to reducing operating costs as appropriate, look for ways to improve your receivables and payables to keep cash on hand longer. For example, Centime’s commercial credit card allows teams to stretch their payables by 20 to 50 days at no cost.

Aside from optimizing your payment methods, we recommend optimizing working capital by negotiating with buyers and suppliers to shorten days sales outstanding or extend days payables outstanding, while ensuring that you maintain good relationships with your customers and vendors. Even making small shifts in receivables or payables by a day or two can have a positive impact on working capital. 

4. Consider alternate funding sources 

The majority of commercial borrowers turn to banks and online lenders for credit, yet there are drawbacks to both. Banks, a trusted source of credit, require companies to fill out detailed applications and then wait a long time to get a response. Whereas online lenders simplify and speed up this process, their loans are typically more expensive and carry unfavorable repayment terms.

To address this issue and deliver the best of both worlds, we developed Centime Credit Line and Credit Card, backed by FNBO. The offering, which provides a short-term line of working capital credit with competitive rates, features a fast, easy application and approval process, and is backed by a trusted banking source. There are no application or origination fees, or repayment costs. Instead, companies are assessed a small daily fee against an open balance, and can even earn rebates through an accompanying credit card. By using a line of credit, SMBs can gain peace of mind, knowing they can access cash when they need it – to smooth over cash flow issues due to business seasonality, a gap in the timing of payables and receivables, or other reasons.

5. Hope for the best, but prepare for the worst

When the financial environment is doing well and money is easy to come by, it’s easy to focus on priorities other than credit. It’s important, though, to always have a fail-safe credit option in place. Protect your company during times of tight credit by securing access to loans before it becomes more difficult and expensive to obtain.

While all companies depend on solid cash flow to operate and grow, it’s even more important for SMBs which have fewer financial levers at their disposal.  Ongoing insight into current and future inflows, outflows and working capital is critical, especially with a potential credit crunch on the horizon. By automating financial processes, conducting short- and long-term forecasting and planning, and exploring alternative options for credit, you will help ensure that your company will not only be able to survive, but thrive, in all economic climates.