BRAND TALK: Guard Against the Next Downturn With Cash Reserves: Here’s How

By / 6 months ago
Scott Simpson

Scott Simpson, CEO
Blue Tarp

Scott Simpson is the president and CEO of BlueTarp Financial. BlueTarp is a B2B credit management company that pays suppliers upfront for their sales and protects them from risk, so they can fund the growth of their business. Headquartered in Portland, Maine, BlueTarp has partnered with over 2,000 suppliers since 1998.

You can reach Scott at ssimpson@bluetarp.com or 207-797-5900.


What kind of companies weathered the Great Recession the best?
The companies that survived—or even thrived—were ones who already had in place good A/R management practices to mitigate their exposure to not getting paid and a balance sheet that could absorb shocks. You can’t put on a life-jacket after you fall overboard in the water.

Is another downturn coming?
Absolutely.

The more critical question is this: When will it arrive and how bad will it be? We aggressively monitor internal delinquency trends and the credit risk status of our portfolio, as well as broader macro-economic drivers. Delinquency levels have risen every year over the last 4+ years, while bad debt levels have remained low. What that tells me is that our industry has returned to elevated levels of contractors close to the edge. When the next recession comes, those will be the first ones to go bust. If you wait to take preventative measures until you know you are in a recession, it’s too late.

How much cash should I have on hand?
A good rule of thumb is to have the equivalent of 3-6 months of operating cash on hand, or the ability to access that amount via open-to-buy on a line of credit or other means. If you are looking to more aggressively expand by buying other businesses, opening a new location, or making big capital purchases, you’ll definitely need more.

How can I improve how I manage receivables to improve cash flow?
Waiting to get paid can be paralyzing and cause you to have to use a chunk, or even all, of your line of credit to support A/R. The fundamental challenge is that you pay your suppliers typically in Net10 or Net30 terms, but your customers may pay you a lot more slowly.

You are effectively a bank for them. If you want to improve this, aim to shrink the gap between A/R and A/P. Request that all customers pay down or entirely clean up their delinquencies. Move customers with severe delinquency payment trends to COD. Assess late penalties if they pay late. Also, try to negotiate better terms with your suppliers.

Can a credit management service help build up a cash reserve?
Yes. Consider using a B2B credit management company like BlueTarp that will fund you upfront for your sales and protect you from credit risk. BlueTarp frees up cash flow, takes credit risk off of you, and integrates seamlessly into how you run your business.

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