Managing Cash Flow During A Crisis

June 08 2020 | Category: Small Business Finance

There is no denying that Covid-19 is a crisis. In fact, it’s what we would describe as a ‘Black Swan Event’ – something that comes as a surprise, has a major effect, and will probably be pretty predictable once we have the benefit of hindsight. But right now we are sailing in uncharted waters, and a lot of businesses who thought they had a solid disaster recovery plan in place are starting to realise one thing – they may not be as prepared as they thought they were. Or at least, they didn’t put ‘pandemic’ in the list of things to prepare for, since they happen so rarely! So now the focus of most business owners has shifted to protecting employees, understanding the risks to their business, and managing the disruptions to cash flow caused by the virus. Cash flow management isn’t a simple thing at the best of times, but managing your cash flow in a crisis? That requires some detailed planning and quick action. To help you out, here are a few steps you can take to get things under control as fast as possible.

Adjust Your Business Plan to Improve Profit Margins

A cash flow shortage might seem a bit scary, but it should also lead you back to the basics of your business plan. Back to analysing your planning, processes, operations and expenses, and what you could do to improve them. In other situations, we would tell you to look for the root of the issue and determine whether it’s a short- or long-term problem, but with Covid-19 the cause is pretty clear. Instead, use your profit and loss accounts and identify the areas of your business that are the most and least profitable, and adjust your business plan to favour the more profitable. Optimise your pricing structure and identify areas of waste or unnecessary spending that you can cut, even if it’s just on a temporary basis.

Speed Up Accounts Receivable

It’s not often we would say this, but you can also take a page out of the Tesla cash-flow-crisis-playbook and speed up your accounts receivable. The faster money starts flowing back into your business, the sooner you can get back on a level footing and operating as normal. In Tesla’s case, they sped up their receivables by offering and accepting pre-orders for a product before it even hit production, but you can use other strategies to accelerate your receivables. For example, you could:

  • Ask new customers for a deposit/partial payment. If you don’t already, start invoicing for all, or part of the service/product up-front, before delivery. This not only shows that your client will be willing to pay the full amount, but means your business gets a boost as well.
  • Start sending invoices early. Adjust the management of your receivables to invoice clients immediately following the delivery of products or services, rather than sending out all invoices on a particular day of the month. The sooner you send an invoice, the sooner you will receive payment.
  • Send invoices more frequently. If you work on a service or project basis, stop waiting until completion to ask for payment. Start sending invoices every week or two weeks to cover the services up to that point. This will make it easier for clients to afford and give you a more regular cashflow boost.
  • Focus on money you’re already owed. If you have outstanding debtors, now is the time to call them in. Start making phone calls and collecting money that should already be in your account but isn’t.
  • Make it easy for clients to pay. If it’s simple to do, clients are much more likely to pay promptly. If you can, look at mobile and electronic payment options, credit cards or direct debits.

Negotiate with Suppliers

Supply chains are a bit precarious right now for many people, either because of a shortage of materials or because their customers can’t pay. Rather than just avoid paying, or avoid ordering, talk to your vendors openly. They understand the strain businesses are currently under, and if you open up a conversation then you may find they are willing to work with you. While some might be unwilling to budge at all, the odds are that vendors who you’ve been loyal to and worked with a while will be happy to come to an agreement during a right situation. You never know unless you start the conversation, so it’s always worth trying.

Consider Your Borrowing Options

Cash flow shortages can be caused by a lot of things, but at the end of the day it still means more money is going out of your business than coming in. One way to solve this is to find a way to bring money into the business. During Covid-19, the government has launched a number of support and financial aid packages to help tide businesses over through the difficult period, and it might be worth your while to look into them. Of course, you should always approach loans and credit cards in an informed and careful way, making sure you understand the interest rates and have a plan for paying the money back in the future. Remember that if your business has an intrinsic problem that’s causing, or adding to your cash flow problems, then debt might just be putting a band-aid on the problem, rather than solving it.

At Chilvester Financial, we understand how difficult Covid-19 is to cope with, and how much it has impacted businesses in every industry over the past few months. Despite the fact we can’t be in the office, the team are still able to give you advice or support over the phone, help you with your cash flow planning or offer our thoughts on your strategies moving forward. So, if you need some advice or information on the support out there, just get in touch with us today.