COVID-19 has put the world into a tailspin, and no amount of crystal ball gazing will provide the answers to how and when things will be settling down.
It’s in these uncertain times that businesses must hope for the best, but also prepare for the worst. There certainly hasn’t been a time in our history when the mantra of ‘Cash is King’ has been so relevant. Accordingly, we offer the following suggestions for managing your cash flow in a crisis.
Understand what your current cash position is
- How much cash do you have in the bank and how long will it last?
- Have you run through several scenarios based on revenue increasing or decreasing over the next 3 to 6 months?
- Make sure your financials are kept up to date so that you can monitor profitability, overheads, stock levels as well as debtors and creditors balances on a timely basis.
- How often should you be checking your cash position, weekly or monthly?
- Are your current and expected cash flows able to meet the immediate needs of the business?
What actions can you take to improve your cash position?
- Improve how you are managing your debtors and creditors. Have a strategy in place and know that others will be experiencing similar cash flow challenges. You may need to consider prompt payment discounts to improve speed of payment during this period.
- Reducing your variable costs is often a faster way to address your cash outflows. Identifying where can you make savings, target the obvious areas like cost of goods, marketing or R&D. Even the smallest incremental improvements can have massive impacts on cash availability.
- If wages are a large cost line, what strategies can you implement to avoid laying staff off?
- Many small businesses have large amounts of cash tied up in inventory, can you realistically reduce your inventory buffer to address your short-term cash availability or are you able to sell at a discount to bring cash in.
- Communicate to your landlord, bank and Inland Revenue to discuss deferred payment options.
- Review all capital expenditure for the next 3 to 6 months, what is urgent and what is not.
- What government support is available? Whether its wage subsides or tax relief, make sure you understand what support to available.
- Understand where cash leakage occurs and how to mitigate it.
Understand what your Working Capital looks like in 3 to 6 months.
- Working capital is a measure of liquidity or cash in the business, and it reveals whether a business can pay its obligations. Working capital is the proportion of an entity's current assets (stock and debtors) to its current liabilities (creditors and overdrafts), and shows the ability of a business to pay for its current liabilities with its current assets.
- Get comfortable with your ability based on worst or best case scenarios to meet your creditor and lender obligations, if it’s looking unlikely, then now is the time to have those conversations.
Are there opportunities in a crisis?
- Have you looked at alternative revenue strategies? Businesses around the country are changing the way they operate, whether it is transitioning to online sales, moving from B2B to B2C models or virtual meetings.
- Is this a time to review your business model and assess the products and services you provide. It might be time to review the revenue vs cost of your products and eliminate slow moving or high cost products.
- Are there opportunities for growth such as new markets or differing geographical locations?
- During times of crisis we should change our focus to working on the business.
Have you got a cash flow management strategy to financially weather the storm?
- Understand the key issues and the steps you need to take to mitigate the issues
- Communication is key, whether you are debt or equity funded, the time for having those hard conversations with banks or shareholders is now, particularly if it is looking like you will need additional finance, or favourable terms to get through this crisis.
- Being informed is the key to having successful outcomes when talking to key stakeholders about your funding options. With accurate information, or cash flow scenario planning, you can clearly show how much cash you need and for how long. If you require short term refinancing or need to look at longer-term sources of funding, then having the right information helps this decision-making process.
Talk to us: Nexia New Zealand has to date successfully managed and assisted businesses in navigating the unknown that is COVID-19. We understand your business and can work with you to determine what options are available. We are also here to challenge your thinking and will identify the flow on effects of your decisions. We recognise we are now in a very challenging and complex business environment, and are here to help you guide your business through these uncharted waters.