It’s not hard to correlate the current situation with previous economic downturns and recessions. While the recovery of 2018 was quick, there are new, more crippling factors at play with the COVID-19 shutdown which has already had global economic and financial ramifications that will be felt throughout global supply chains.

Another key consideration – there’s a new generation of leaders at the helm of a great number of businesses in this country – one that has never experienced a significant downturn or managed an organization through challenging times. Navigating a business through volatile economic conditions is no easy feat even for experienced managers. Experienced or not, there is one business tip that will help support your survival during an economic downturn: protecting your cash.

Cash is the lifeblood of a business, but effectively managing your cash inflows and outflows doesn’t happen easily. More than ever, it’s critical to properly evaluate the steps to protect the cash flows of your businesses.

Below are some considerations to maintain and maximize strong cash flow.

1. Tighten Collections Processes

If customers don’t pay you within customary arrangements, reach out to them and check in. Some companies use their vendor payables like a noninterest-bearing line of credit. If you are willing to let them stretch out to 90 days or more, then that is less money that they need to borrow from their bank (and perhaps, more money you might need to borrow from your bank). Regular customers may start taking longer to pay or a major buyer might jump ship which is sometimes harder to replace, especially in the current environment.

2. Review Payment Cycles

It’s critical for business owners to understand the interaction between the money being spent to generate revenue and the revenue being generated. One way is to track your “cash flow gap” – that is, the number of days in payables as compared to the number of days in receivables – the closer these ratios the better, and hopefully the days in payables are slightly higher. As you work to match revenue to expenses, you also should ensure that your selling cycle (cash inflows, including outside financing) matches your disbursements cycle (cash outflows). Ideally, you’re converting sales to cash more quickly than you’re paying expenditures, thereby strengthening cash flow.

3. Data Reporting

Report generators are critical for managing cash flow accurately. Your system should allow you to readily generate accounting reports — daily, weekly, monthly and annually. This means being able to easily record and access recurring transactions as well as accounts payable agings and payment schedules. Daily flash reports can be created for management to see the day-to-day key drivers of cash flow in the business and allow them to react quickly. In addition, budgeting tools can help you set and monitor budgets, perform “what if” analyses and compare actual results to goals.

4. Leverage Your Financial Statement

The data gathered by your accounting system ends up in your financial statements. Factor in the cash inflows and outflows of daily business operations, asset purchases, sales proceeds and financing activities. Since it excludes noncash accounting items, you can use it to pinpoint cash flow problems. Once you have accurate financial statements, be sure to use the information they provide to help make any necessary adjustments as you move forward.

We are working alongside our clients to assist in assessing and implementing strategies to proactively address the current economic environment. We’re helping in the following ways:

  • Financial modeling/forecasting to determine the cash flow impact of revenue reductions under various scenarios
  • Assessing fixed/variable cost structures and advising on steps to consider when addressing top-line revenue reductions
  • 13-week cash flow modeling and related sensitivities
  • Addressing the impact on debt covenants of various scenarios and assistance in addressing with lenders
  • Working with your lenders to find solutions to problems, including where necessary negotiation of modification of terms and conditions of debts
  • Maximizing Paycheck Protection Program loan forgiveness
  • Assessing federal and state/local assistance such as SBA loan opportunities for disaster relief and business interruption loans

If you’d like to discuss how you can better navigate your business during this uncertainty, contact a BMF Advisor to discuss which options are best for your business.

 

Visit our COVID-19 Resource Center for the latest information and resources for you and your business.

About the Authors

James E. Merklin
CPA/CFF, CFE, CGMA, MAcc
Partner, Assurance and Advisory

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