Written by Joni Jimbo on May 20, 2020 in Budget Info

Part One

As most well-run small to mid-sized businesses know, it’s the company’s cash flow, not its profits on paper, that indicates just how strong the business is. Managing cash flow is essential to a business’s survival, a fact that the recent pandemic has only made more real.

COVID-19 has certainly upended our world in multiple ways. While the old way of looking at cash flow—What’s my cash balance currently? What will it be in six months?—still holds true, there’s a great deal more to take into consideration if you want to ride out the current economic turmoil. In part one of a three-part series, we offer some insights into best practices to manage your business’s cash flow during these trying times.

Managing your supply chain risk

COVID-19 has definitely proven itself to be an unknown risk for businesses. If your company hasn’t already built a strong line of defense against unknown risks, what can you do now that you are in the thick of it? The first step is understanding the financial status of your customers, partners and suppliers. Will they be unable to pay for your product or supply you with the materials you need to make your product? Next, are you being transparent with your organization about how much of the current risks your business can handle? And finally, empowering employees and staff to problem solve and react in real time to the crisis can open up creative solutions to help you manage any risks that have arisen.

Keeping your financing viable

One thing that everyone has learned since the onset of the coronavirus is how quickly situations fluctuate. This is especially true in terms of financing. Your past options may no longer be available. Now is the time to explore different financial scenarios to see how your business may be affected. It is also a good idea to regularly check in with your financing partners to see what has changed for you and what new or additional areas you may need to explore to keep your company solvent.

Focusing on cash-to-cash cycle

Remember when profits and losses were your main focus? COVID-19 even has changed how most companies think in that regard. Pre-pandemic, it was common for a business to pay the most attention to inventory out of the three areas of supply chain working capital (payables, receivables and inventory). For the present moment, your company probably would be better served by focusing on a more coordinated approach that puts equal emphasis on all three. Run through the various scenarios of what your company can handle in terms of your current cash burn rate and cash position. Then brainstorm what changes can be made to address any liquidity issues you anticipate.

Thinking across your organization

The disruption of the supply chain from the pandemic will require most businesses to rethink their approach. Rather than simply concentrating on the disruption to inventories and other shortages, you will need to take a broader view. Thinking across your organization means considering finances and operations. As working capital becomes the issue constraining inventory, how will you make that work with the supply chain and inventory you have currently?

Revisiting variable costs

With reducing cash outflows the major focus for most, if not all, businesses for the near future, the quickest way to do this is by reducing your organization’s variable costs. If some of your variable expenses included travel or discretionary spending for entertaining, you’ve already reduced or eliminated those. Other areas which could be temporarily beneficial to weathering the crisis include implementing a hiring freeze or suspending training. If labor costs are your company’s major expenditure, you may need to introduce pay reductions or cut back on contract labor to avoid layoffs.

In the second post in our three-part series, we’ll take a look at revisiting any plans you may have for capital investment, how to focus on your inventory management, the intelligent extension of payables, improving your management of receivables and when to consider alternative supply chain financing options.


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