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How to Manage Your Cash Flow in a Recession

A woman entrepreneur owning a small business

An economic slowdown, like a recession, causes a drop in consumer spending and a decline in production. With less money circulating in the economy, selling goods, receiving payments on time, paying suppliers, or getting a loan becomes tougher. Interest rates increase, there is a decline in the value of stocks and assets, and there is a decline in profits as people spend less.
Recession fears have been looming over Europe in recent times, and though latest forecasts state that the EU is set to avoid recession, economic instability still persists. To avoid disruptions in business, brands must take necessary steps to hedge themselves from risk. Managing cash flow efficiently is one such step, whereby brands can protect themselves while ensuring business continuity.

Importance of Cash Flow Management

Effective cash flow management can help a business survive difficult times like a recession. Planning ahead can help, regardless of what your business sells. Cash flow is a vital metric of a company’s financial health. In simple terms, cash flow is the amount of money coming and going out of your business, thus affecting your cash reserves and ability to do business. Managing your cash flow allows you to see the details of your income and spending. This helps you build scalable plans and survive the ups and downs of running a business. A positive cash flow also enables you to prove your creditworthiness and successfully apply for loans.

How to Manage Cash Flow in a Recession

Small businesses face the crunch of a recession the most. A recent report says that 92% of businesses don’t have plans in place to manage their cash flow during a recession. Difficult economic periods can affect businesses in different ways. Smaller companies face the brunt more because they have limited resources. There is no definitive way to protect your business from a recession. But cash flow management helps you juggle through these tough times and avoid many of the problems that come with a recession. Here are some tips that will help you better manage your cash flow during an economic shift.

1. Send Your Invoices on Time

Slow payments are a bane for e-commerce merchants. And during economic crises, when everyone is watching expenses closely, payments can get delayed further as companies hold on to funds. Hence, sending early invoices is a great way to clear payments on time. Sending invoices on time also helps to track how long it takes to get a payment cleared and accordingly take action if payments are delayed. You also get to know who a late payer is and who pays on time. This way, you can be prepared for those who pay late while prioritizing customers who pay on time, offer them early-payment discounts and strengthen your relationships.

Outstanding payments can cripple your business, especially in a recession. Hence, you need to monitor your days sales outstanding (DSO), so that you are aware of your outstanding dues, and in turn, offer flexible options like installments or discounts to help clients pay sooner. This will help your clients keep pace during a recession without missing out on a due payment. When you work with Novalnet, you get access to automated invoicing, which makes your entire billing process automatic. You can pre-schedule payments, send out reminders, and ensure payments are settled on time, with minimal time and effort invested. We can help you automate your billing function, so that you can focus on running your business.

2. Check Your Profit Margins

Regularly assessing your financial health helps you better prepare for tough times. Profit margin is one of the ways a business predicts its revenue after clearing bills and other expenses. Monitoring your profit margins regularly gives you a good idea of how your business is performing and which areas you can change and improve. Slow sales, higher costs, and low customer confidence can all impact your company’s profit margin during a recession. So, it’s good to have an estimate on which products sell the most during a recession and accordingly optimize those. Look closely at your profit margins for important clues on which products are in demand or which have been more difficult to sell. Accordingly, you can scale back on weaker products and capitalize on your core ones.

Aligning your products with consumer needs minimizes the chances of losing clients. It’s a great way to keep generating revenue and expanding your market from a steady base of loyal customers and even new ones. Payment automation can help you do this. You get more granular insight into your payments data – how much money is coming in and going out, identify bottlenecks and align your finances to ensure your profit margins are in line. Payments automation also helps you to analyze and understand what customers want, how they are spending, where they are saving, etc. This helps you align your payments to better meet their needs, thus fostering higher satisfaction.

3. Automate Your Accounts Receivable and Accounts Payable Process

It is important to optimize your internal resources and operations in order to keep costs low and your business efficient during a recession. Automation enables this by streamlining operations, improving efficiency, and eliminating manual intervention. It prevents errors arising from manual work, cuts costs, reduces the DSO cycle and creates a reliable billing and collection process. All of this is vital for a positive cash flow.

AR/AP automation helps streamline key functions like invoicing, payment processing, and payment collection. As a result, payments are received and paid on time. It also helps to create a more valuable and personalized experience for clients with features like customizable follow-up communication, customer self-service portal, smart dispute management, etc. This, in turn, helps build good client relations. Additionally, real-time data on market trends help your business stay agile and competitive. Novalnet’s automated AR/ AP solutions help you to make your operations seamless, increase transparency and aid in better decision-making. This helps you improve your margins and make your business more resilient to withstand financial downtimes.

4. Create a Cash Flow Forecast

Business owners can mitigate risks and recession-proof their businesses by increasing the frequency with which they monitor and manage their income and expenses. Creating a cash flow forecast is a great step for small and medium businesses as it gives them a realistic picture of their cost and revenue flow in the forecasted period. A detailed insight will help you better plan expenditures, sales, and revenue targets. It will also inform you whether you need a loan or seek an investor. And while this may seem like a new responsibility, it’s not all that difficult.

Investing in good accounting software will give you good ROI and simplify many of your accounting tasks, including cash flow forecasts. With Novalnet’s advanced analytics tools, you get richer, deeper insights which help you forecast your cash flows better. Plus, our payments automation tools give you greater visibility and control via single dashboards to monitor your entire payments function.

5. Use Tech for Financial Management

From risk management to improving internal efficiency to critical industry insights based on real-time data, using tech for financial management brings great advantages for all businesses. Working with a good service provider lets you adopt innovative payments tech, which will help evaluate current challenges and let you know how well your business is ready to handle disruptions and risks. With modern payments tech, you benefit from faster and more efficient payments processing, higher fraud security, and full compliance with all laws and regulations. This means your business stays competitive at all times. Investing in tech is a smart way to retain your best people. This combined with data-driven decision-making and the right strategy is a great way to keep a business running through challenging times like a recession.

When you work with Novalnet, you get access to the latest tools, industry insights and tech know-how to build an efficient payments setup. This helps you remain competitive and keep your customers happy.

How Can Novalnet Help

Continuous improvement is critical for a business to grow. Knowing how your financial processes can improve will help the business survive through challenging times. Although economic instability can make things a lot more complex, there are measures you can take to be more prepared, even during a recession. Working with trusted partners like Novalnet gives you access to high-end payment services and AI-based risk management solutions. With years of experience in processing payments for Europe’s leading brands, we can help simplify your cash flow management.
As a global payment service provider, we have extensive experience helping Europe’s leading brands process payments. Our technology allows you to accept payments globally in 125+ currencies in 150+ automated country-specific payment methods. From our instant payment plug-ins to our AI-based risk management tools, we have the resources to get your payments up and running in no time, and with zero hassle.
Reach out to us today to know more about how we can help your business.

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