Managing Cash Flow During a Crisis and Beyond

Don Goettemoeller |

Your cash flow is the financial story of your business. It tells the story of your high points and low points, where the money comes in and goes out, and is the lifeline of your business in times of crisis. Proper cash flow management can mean the difference between survival and going under for small businesses especially in periods of market and economic downturn, such as the period of challenge faced currently by the ramifications of COVID-19. 

Here are seven steps to managing your cash flow during a crisis.

1.  Update your financial statements – The key to managing your cash flow is operating from current financial statements. As a first step, ask your CPA to provide you with an up-to-date look at your business’s financial picture and discuss the statement together. Your CPA can help you identify areas of opportunity and challenge to ensure you’re proactively optimizing your business’s financial situation no matter the circumstances of the marketplace. 

2. Understand your fixed and variable expenses – Hand-in-hand with updated financial statements comes an understanding of your fixed and variable expenses. Sorting your expenses into these two buckets will help you to see where you have expenses you can cut temporarily or permanently to save cash, or where you can negotiate to improve your cash flow in times of need.

3. Know your credit options – Next, contact your banking professional to understand your credit options. In times of crisis, the likelihood of needing to dip into lines of credit increases, and you need to know what’s available to you, the terms, and have a plan for repaying it when the dust settles. This will help you project your cash flow as you begin to model scenarios through a period of challenge

4. Project your cash flow – Your first cash flow projection should be conducted using your current levels of income, expenses, and lines of credit so you can get a clear look at where you stand without change. Additionally, you will want to look back at least five years to see how your financial picture has fluctuated in the context of times of growth and downturn. Then, as you project outward into the future, break down your cash flow at micro increments, weekly or biweekly, to see where and when your cash reserves and credit lines may begin to run out. This can help you predict where you will need to make changes internally and when.

5. Increase income – Once you’ve projected your cash flow out, look at ways you can increase your income. 

  • Accounts receivable - You don’t have to be facing a period of crisis to start to clean up your accounts receivable (AR). Improving your AR timeline is essential to improving cash flow. Work with your customers to set up payment plans that make sense and adjust your AR policies where needed. Are you offering more time than necessary to pay-in-full? Are you following up with late payments? Are you offering multiple methods of payment? Now may be the time to start considering credit cards if you aren’t currently accepting them.
  • Pivot your products/services – The COVID-19 pandemic is forcing many small businesses to pivot their offerings. Restaurants are offering delivery and takeaway, and grocery stores are offering personal shoppers as a couple of examples. As you look around, you’ll see small businesses across the country changing up the way they offer products and services to meet the needs of their customers. How can you pivot while staying true to your strengths? 
  • Offer gift cards/certificates – If you’re not already offering gift cards/certificates, this may be a good option to start if your services warrant it. Make it as easy as possible for customers to purchase these over the phone or online so you can start to realize some cash now. 

6. Decrease expenses – Decreasing expenses is a natural place to start to try improving cash flow during a crisis, but it must be done carefully to maintain relationships with customers, vendors, and employees. Consider your fixed and variable expenses and what can be reduced or cut. Adjusting your utilities at the office if you’re working from home, implementing hiring freezes if you’re unsure about the future, and redistributing contract work to employees are just a few ways to decrease expenses. Additionally, consider:

  • Negotiating contracts – Work with your suppliers to understand your options for delaying payments, keeping in mind that they have expenses to meet as well. Approach negotiating contracts carefully as you do not want to damage important relationships.
  • Cutting payroll as a last resort – Before you implement lay-offs or furloughs, consider moving employees around the company to meet other needs, or offer work-from-home when possible. If you must make lay-offs or furloughs, ensure they meet department of labor guidelines.

7. Rerun your cash flow model with different scenarios – Considering your options for increases in income and expenses, model your cash flow using various rates of change in those areas. Use realistic numbers to see how much of an improvement you can expect by making these adjustments over time. 

Times of crisis can force small businesses to take a long hard look at their financial picture and address cash flow issues that may have been lingering long before the major event. By monitoring up-to-date financial statements and performing cash flow projections, you can become a better steward of your business’s finances in times of crisis and times of opportunity.  

Material discussed is meant to provide general information and it is not to be construed as specific investment, tax or legal advice.