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Managing Cash Flow for Privately Held Businesses in the Wake of the Trade War
How to Mitigate the Impact of Tariffs on Your Business
Due to the imposition of a broad range of tariffs by the current administration, there's a growing trade war taking place between the United States and a number of its trading partners, most notably China, Mexico and Canada. While it's extremely difficult to predict the long-term ramifications of retaliatory tariffs, what are the implications for small businesses when managing cash flow? Here's some guidance to help your business mitigate the effects of the ongoing trade war.
Focus on the Financial Impact
Tariffs come in two forms: a fixed percentage of an imported good or a flat amount per item. Based on the type, you should create models detailing the financial impact of the tariff on your company's financial performance. Make sure you understand the terms of the tariff, including its size and duration. In particular, pay close attention to the impact on cash flow and your ability to generate sufficient working capital to fund your operations and support special projects, such as the launch of a new product or expansion of your facilities.
Pay close attention to what your competitors do in the introduction of an import or export tariff, as well. While some may raise prices, others may leave them unchanged. Before making any adjustments to yours, model the impact of increasing, decreasing or leaving prices the same on your company's financial performance.
Adopt a Proactive Stance
If your company carries debt and you anticipate breaching your debt covenants, consider adopting a proactive approach by notifying your lender of your concerns. Most will welcome the opportunity to work with a borrower to restructure their debt instead of waiting until the loan is past due.
With a detailed financial forecast in hand, including when you might violate debt agreements, meet with your financial institution to discuss creative ways to fund shortfalls in your company's cash flow. For example, is now a good time to refinance your company's debt to a better rate and longer maturity? In a worst-case scenario, does it make sense to factor your company's receivables? What about a line of credit, which could also help shore up short-term cash flow deficiencies? Has your executive team considered seeking an equity investment? Your financial experts can provide the pros and cons of each approach as well as share additional ideas to help your company preserve (or maybe even improve) its financial standing.
Alternatives or Withdrawal
If a tariff applies to a good your company imports, now is the time to evaluate domestic suppliers who offer the same product. While a local producer may raise its prices to capitalize on higher demand, if you foresee additional increases in the tariffs applied to imports, it may make sense to lock in pricing with a domestic producer at today's rates.
If a tariff places your company's exports at a significant price disadvantage to competitors, and your sales fall significantly, consider withdrawing from the market. If withdrawing would make reentering the market too difficult, look for ways to reduce your costs to break even or make a small profit. That, or see how long you'll be able to weather the storm in that market before staying there becomes permanently damaging to your overall business outlook.
As a small-business owner, when it comes to managing cash flow, you're probably struggling to figure out the long-term impact of tariffs on your business. Nonetheless, while you can't control how and when a government imposes a tariff, your company can take steps to mitigate their effects.
We understand the responsibility you take on as a C-suite executive, being tasked with making decisions that can make or break the organization. Our community of experts provides guidance based on our experience working with clients like you.
The opinions expressed and information contained in any article published in the Vault are given in good faith and considered reliable. However, such opinions and information are subject to change without notice and are provided only as of the date issued. Neither Boston Private nor its affiliates warrant the completeness or accuracy of such information. Any third-party opinion is solely the opinion of its author and does not necessarily reflect the opinion of Boston Private or its affiliates. The materials on this website are for informational purposes only and do not take into account your particular investment objective, financial situation or need. Since each client’s situation is unique, you should consult your financial advisor and/or tax planning professional before acting on any information provided herein.