Cash flow management for small businesses during COVID-19
The Coronavirus has resulted in a significant challenge to our economy and small business operators. Many businesses are facing financial pain. The hardest hit sectors are tourism, travel, hospitality and entertainment sectors, although consumer goods and retailers are also being impacted
The Federal Government of Australia has reacted with unparalleled support measures to assist businesses. However, these measures will be reduced over the second half of 2020 and businesses will be left to manage a subdued business environment. Good cash control and effective cash flow management will be increasingly important to empower businesses to continue.
It is critical that businesses understand their cash flow management and the effectiveness of their cash control to be prepared for the likely lengthy Coronavirus recovery period. Over the next week we will be discussing some of the key area’s businesses should be confident on.
Good Cash Controls
Good internal controls are important to minimise cash leakage and reduce the risk of fraud.
Cash management is the process of collecting and managing cash flows. It is a key element of a company’s financial solidity. Cash is the main asset companies use to pay their responsibilities on a regular basis. In business, companies have a variety of cash inflows and outflows that must be carefully managed in order to meet payment responsibilities as they fall due, plan for future payments and maintain satisfactory business solidity.
Given the importance of cash flow management in times like these, businesses should look to develop a plan for cash management as part of their business risk and continuity plans. Businesses often look to cut staff, delay paying suppliers or reduce dividends to generate cash, however these measures can have negative implications for stakeholders and are not always supportable. In order to maximise cash, business should understand all of the factors that impact cash flows in addition to the traditional working capital measures.
Cash Flow Forecasting
The cash flow forecast comprehensively projects a business’s cash flow and its future cash position. It includes cash received from accounts receivable, cash paid for accounts payable, cash paid for investing, and cash paid for financing. A cash flow forecast should report how much cash a company has readily available. Cash flow forecasting is often done on a monthly or quarterly basis, however during times such as these, businesses are turning to forecasting cash on a weekly or even daily basis.
Working Capital Management
A primary reason why small businesses fail is a lack of funding or working capital. In most instances a business owner is intimately aware of how much money is needed to keep operations running on a day-to-day basis, including funding payroll; paying fixed and varied overhead expenses, such as rent and utilities; and ensuring that vendors are paid on time. However, owners of failing companies are less in tune with how much revenue is generated by sales of products or services. This disconnect leads to funding shortfalls that can quickly put a business out of operation.
Variable and discretionary Costs
It is important to minimise discretionary spending and possibly try to convert fixed costs to variable costs.
Improve your cash to cash conversion cycle
There are several things you can do to improve both receivables and payables efficiency, ultimately leading to higher working capital and better operating cash flow. You can reduce the days payable or offer discounts to your customers for quick payments. They may also choose to use technologies that facilitate faster and easier payments such as automated billing and electronic payments. Advanced technology for payables management can also be helpful. Companies may choose to make automated bill payments or use direct payroll deposits to help improve payables cost efficiency.
Inventory can soak up cash. It is important for businesses to monitor order points and minimise order sizes whilst they focus on increasing inventory turnover. Well run businesses will understand and manage inventory turnover on a unit by unit basis.