The importance of cash flow during uncertain times

As business owners navigate the challenges of the COVID-19 pandemic and its associated lockdowns, there are many strategies that should be considered to improve their cash flow situation.

At Banks Group, we have been speaking to our clients throughout the pandemic. Some are very uncertain and scared, while others are going stronger than ever. It has become very obvious to us that ‘the King’ has made a comeback, as it did during the global financial crisis: CASH is back.

Cash is the difference between money out and money in

Cash and headroom (ie undrawn finance balances) is critical in situations where operations and output are impacted while staff and establishment outgoings remain fixed. This is also referred to as liquidity, meaning a business has access to cash at short notice.

Businesses should review all assumptions that feed into their cash flow projections and run a number of scenarios on profit and loss, balance sheet and cash flows; these should show different degrees of interruption to business operations. It is important that this is kept up to date as information evolves, and any triggers relating to liquidity risk must be identified.

Depending on reserve levels and how exposed your specific industry sector may be, businesses may need to consider matters such as expanding debt facilities with their lenders, postponing large financial outgoings, anticipating covenant problems, and making arrangements with suppliers and landlords to extend credit. We have outlined a few methods below.

Manage debtors (accounts receivable)

Managing your debtors during COVID-19 disruptions is vital, especially with the increasing reluctance for businesses and individual consumers to part with their cash.

Some ways you can improve your debtor position include:

• Issue invoices to your customers at the first opportunity (including interim billing), and monitor them closely.
• Review your aged debtors report on a regular basis, perhaps even daily, in order to identify when your customers have gone outside their aged credit terms.
• Institute a cash on delivery policy for slow-paying customers, rather than refusing to do business with them at all.
• Ask your customers to make deposits at the time orders are taken, especially new customers.
• Offer discounts to your customers for early payment of invoices.
• Very importantly, speak to your bank to see if they have other transactional account offerings that may better suit your current business needs.

Create business income

Think about how your business may be able to adapt and pivot to create other income streams that can bring in cash.

Some examples include:

• Restaurants offering takeaway food and groceries for pickup and delivery
• Manufacturers of alcohol products switching to make hand sanitizer
• Yoga and Pilates studios offering online classes
• Wholesalers selling to individuals as a result of business clients being closed

Control expenses

Managing your expenses is as important as managing revenue. It is essential to use a rolling forecast or budget, perhaps even on a daily basis – this will help you identify unexpected or unnecessary expenses.

Ways to control your expenses include:

• Request quotes for any major expense items (in order to avoid unnecessary surprises).
• Don’t always focus on choosing the lowest price – sometimes flexible payment terms can improve your cash flow more effectively.
• Seek fixed costs from suppliers if possible, which will give you greater certainty on your cash flows.
• Undertake a full a line-by-line review of both your fixed and variable expenses, then
  • Cut out or put on hold all unnecessary expenses.
  • Identify those that can be negotiated with suppliers to be postponed, reduced, deferred etc.
• Occupancy costs – negotiate with your landlord to defer payments or get better payment terms during this period.
• Allow your staff to participate and raise concerns, and listen to what they have to say. Talk to your business partners, staff and family to see if there are other areas of your business where you can cut expenses.

Manage the timing of your cash outflows

You could also improve your cash outflow timing as follows:

• Take advantage of your credit terms. For example, pay your creditors on the date the invoice is due, rather than early.
• Otherwise, negotiate a discount with suppliers for invoices paid upfront or early, if possible.
• Reach out to your suppliers to see if you can extend your payment terms, or enter into a payment plan if cash flow is tight. The sooner you reach out the better – you will need their trust and understanding.
• Discuss the situation with professional service providers – for example, insurance brokers offer invoice funding so you can have up to 12 months to pay your bill.

Tax obligations

While it is important to make provision for tax obligations, there will be opportunities to reduce the amount of tax you pay. You may also be eligible to take advantage of payment plans offered by your government’s revenue collection agency.

Please check arrangements with your trusted adviser, having regard to the current economic impact of COVID-19 on your business profits.

Insurances

Look into your business insurances to see what options you may have with business interruption cover.

Government incentives

• You should check to see if you are eligible for any cash or tax incentives under economic stimulus and relief packages. Some of the support related to businesses can help them to retain staff and continue operating.
• Stay in contact with your accountant and ask questions. As we have seen, things are changing, sometimes by the hour, so take the time to review announcements and communications from your trusted advisers.

Finance

• Apply to your bank for immediate interest and repayment deferrals if required.
• Keep an eye on bank announcements regarding concessions and support measures, such as short-term funding to cover shortfalls and timing.

Supply chain

Businesses need to examine their operations, and review upstream and downstream to identify where the vulnerabilities are. The impact on supply chains has been highlighted by shutdowns across the globe, and some of that impact on businesses is yet to be felt due to lead times and levels of component stocks. Businesses should factor in contingencies around their specific supply chain, particularly for seasonal stock.

Keep good records and seek quality advice

During these times when there is so much going on, we strongly recommend you keep a record of all important documents and announcements in addition to usual business documentation. Make note of all important calls and actions that require follow up.

In supporting our partners and clients during these challenging times, Banks Group’s Corporate Finance team is offering reviews to identify strengths, weaknesses, opportunities and threats for your business. Please do not hesitate to reach out to us if you would like to know more via [email protected].

 

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This article is intended for general discussion and is not intended to represent specific advice. Banks Group shall not be responsible for any entity that acts on any of the comments in this article without first obtaining specific advice from Banks Group.