In Accounts Receivable Factoring, Alternative Financing, Finance Highlight

Businesses in every industry have seen their financial resilience pushed to the limit in recent years. Since 2020, business owners have faced a pandemic, inflation, rising interest rates, a banking crisis, persistent labor shortages, and the disruptive impact of generative AI, to name just a few of the challenges.

It’s hard enough to manage a business at the best of times, but when the economy, labor force, and pace of technological change are so unpredictable, it’s even tougher. This is when the financial resilience of a business can mean the difference between survival and collapse. 

Financial resilience defines a business’s ability to overcome financial hardships and stressors, even when they’re unexpected. Businesses that are resilient have the financial resources they need to react to these challenges and minimize business disruptions and damage.

Here are five ways to strengthen the financial resilience of your business.

Insure (or re-insure) your business

While the structure you choose for your business can provide some protection for your personal and business assets, business insurance can fill in the gaps. 

Some types of insurance are a legal requirement, such as workers’ insurance if you have employees. Other types may be required by your landlord, clients, or bank. But it’s also a good idea to explore insurance options that support the best interests of your business, not just those of these other parties. Ultimately, you want to know that your business will be in a position to recover from the effects of lawsuits, property or vehicle damage, cyber incidents, injury, and other events that pose a threat to stability and continuity. 

At a minimum, you should:

  • Understand your legal and industry insurance requirements.
  • Seek advice from a insurance broker who specializes in business insurance.
  • Identify and insure against the top risks for your unique business type and industry.

Learn the basics of business insurance from the U.S. Small Business Administration.  

Increase business liquidity

Consistent, reliable cash flow is a key factor in a business’s resilience. But the inflow of cash isn’t always within the control of the business, which is why it’s equally important to keep an eye on the liquidity of the business. Liquidity defines the business’s ability to turn assets into cash quickly and without taking a big financial hit. Too little liquidity can mean your business is unable to access the cash it needs to cover an emergency. Too much liquidity can mean that you are not using business capital advantageously. 

To find out where your business stands, you can conduct a liquidity ratio. While there are several formulas for doing this, the current ratio is the most common. The current ratio is a measure of a business’s ability to meet its financial obligations within the next 12 months. 

To calculate your current ratio:

  1. Add up your current assets (available cash, lines of credit, etc.). 
  2. Add up your business liabilities (debts, payroll, etc.).
  3. Divide the total assets by the total liabilities.

The resulting number is your current ratio.

A ratio of 1.0 to 2.0 is healthy for most B2B industries. For businesses with higher turnover and shorter payment cycles, that ratio can be lower and still be considered healthy. 

A ratio rising above 1.0 could signal excess cash. When you have a lot of cash available, it could mean that you’re missing opportunities to use that cash to fund business success and expansion, such as investing in marketing, new products and services, new locations, or new markets. 

A ratio below 1.0 could indicate a business at risk. When the ratio dips too low, it can indicate that the business may be unable to meet its short-term financial obligations, which could jeopardize operations and discourage lenders and investors from doing business with the company.  

You can improve your liquidity ratio by: 

  • Controlling overhead by finding ways to reduce expenses such as rent, utility costs, and staffing. 
  • Selling off surplus or obsolete assets that the business no longer uses.
  • Shortening customer payment cycles or offering early-payment discounts.
  • Factoring invoices to accelerate cash flow.
  • Exploring a wider range of financing options.

Diversify banking relationships 

Many businesses choose to consolidate their financial activities at one bank for the sake of convenience and because banks often reward loyalty with preferential services and rates. However, the collapse of Silicon Valley Bank and other high-profile national and global banks revealed the fragility of the banking system and changed the way people saw the benefits and trade-offs of using a single bank. 

Distributing your banking requirements across several financial institutions mitigates the impact that a bank failure can have on your operations and finances. It could also reduce your risk of permanent losses if you routinely maintain balances above $250,000, since this is the maximum amount insured and guaranteed by the U.S. government. Banking with multiple institutions could also give you more bargaining power when negotiating loan terms and other financial services.

For more information on this topic, read How to Protect Your Business During a Banking Crisis.

Diversify your customer base

Securing a big account can accelerate your business growth and maturity. But for smaller businesses, it can also be a source of vulnerability. When one customer represents a large percentage of revenue, losing them can devastate the business’s cash flow, especially if the business invested in extra resources and infrastructure to serve that customer’s needs. As a rule of thumb, no customer should account for more than 10% of total sales.

It’s also prudent to think about diversifying the types of customers your business serves. Focusing on a specific customer type is the key to developing a repeatable and profitable business model, but it can also be a drawback. For example, many businesses with customers in the restaurant or hospitality industries struggled to survive during the pandemic, whereas those with a more diverse clientele were better positioned to weather the downturn. While it’s not always possible to achieve this kind of diversification, it’s worth exploring the options and developing a contingency plan to cover the possibility of a sudden drop in trade. 

Establish professional partnerships 

Many businesses are founded by self-reliant, entrepreneurial people who are comfortable managing operations on their own. But as the business matures and expands, owners often need specialized expertise to help them manage complex financial assets more effectively. 

These professionals can help business owners make financial decisions that align with their short- and long-term goals for the business.  

  • A bank manager can help the business access cash through various credit options and use financial resources more effectively.
  • A factor can help the business accelerate cash flow, improve the collections process, and improve the business’s credit score. 
  • An accountant can strengthen the business’s financial system, help business owners understand their financial position, advise on financial decisions, and support accounting and tax compliance. 

Real-world business resilience

What does business resilience look like in real life? Read this case study about a marketing company that found a way to bounce back when half of their customer base and revenues disappeared overnight. 

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