Managing business cash flow in tough times

Ever heard of ‘a Black Swan’ event? By now it is clear that the COVID-19 health pandemic falls into this description as it is typically an unpredictable event that goes beyond what is normally expected of a situation and has the potential to lead to severe consequences. Black swan events are usually extremely rare, while their impact is severe. Their occurrence, in hindsight, appear to be obvious.

In the weeks and months to come, the efficacy of our national government’s risk adjusted strategy will be key in the protection of both of lives and livelihoods.

From a business operations perspective during this time, the saying that “cash is king” is now more true than ever before. In a recent survey by Statistics SA 42% of businesses expressed doubts that they have the financial resources to continue operating through the COVID-19 outbreak. Entrepreneurs and management teams should consider a few key areas as they seek to stabilise and preserve their cash reserves.

1. Stress test your risk

Assess the potential short and medium term implications of COVID-19 on cash flow, modelling worst case scenarios and sensitivity analyses in order to understand how the movement between different risk levels could influence your business. Test the capability of reporting available in your business and improve where possible. Now more than ever, real-time information and reporting will be key.

2. Spend less than you earn

Follow the logic of the often overlooked cash flow statement that forms part of your financial statements. Cashflow is influenced primarily by operating activities (income and expenses), investment activities, and financing activities. Therefore if you expect to earn less during the current pandemic and thereafter, you have to spend less or raise more funding. Here are a few practical options to consider:

• Everyone in the business needs to think like a financial director. All parts of a business either produces or requires cash to operate.
• Cut all non-essential costs, while giving special attention to notice periods when cancelling and also services such as subscriptions that auto-renew.
• Convert fixed costs to variable costs, where possible.
• Your customers may be considering strategies to delay payments to you, which means that you need be vigilant with your debtor collection processes.
• Consider how to carefully delay payments to suppliers or financiers, preferably within payment terms or else negotiate revised terms.
• There are a few financial relief measures available. Make sure you utilise these measures for your business as the terms are generally better than normal business funding.
• Ensure you would be able to comply with regulatory and statutory submissions and payments, as this is standard when applying for most of the relief measures available.

3. Communicate honestly with stakeholders

Managing the key stakeholders in a business can be challenging, especially in a stressed scenario as interests would probably be conflicting. Real-time information and clear communication is key. Remember to understand the position of the stakeholder first and foremost when communicating to ensure you proactively manage their expectations.