Cash flow in a time of crisis

Mexican billionaire businessman, Ricardo Salinas Pliego said that “in times of crisis, cash is king”.

If you weren’t already aware, we are in a time of crisis.

The early impact of the COVID-19 pandemic to business is as wide as it is deep. Already we are seeing the impact of supply chain restrictions, the cancellation of contracts and future orders, the Australian Dollar dip past 60 cents US, the travel industry shut down, the loss of hundreds of thousands of jobs and unprecedented levels of Government stimulus around the world.

For SME business the impact is just as severe, if not more so. Not only do they face the same challenges as big public corporations, they face them with proportionately fewer staff, poorer systems and generally a whole lot less cash (whilst it may be far from being enough Qantas announced on that they had nearly $2 billion available cash reserves at the commencement of the crisis). As such the preservation of cash reserves and management of cash flow is not only critical to the survival of many businesses during this time, it is essential so that they can scale up and perform once we reach the other side of this downturn. The reality is that the situation we find ourselves in now is only temporary, and based on our experience post GFC, those businesses that survive will thrive.

So, what do you need to do to protect your cash flow at this time? Here is our 15 key point checklist:

1. Be decisive with your decision making. This is no time for procrastination. If you need to do something, now is the time.
2. Clean up your accounting data so you can clearly determine your current position. Your data should be updated daily and should be used as a reference point to determine your REAL cash position
3. DO NOT run your business from your bank account. Your bank account DOES NOT take into account future receipts and payments, it only provides you an indication at a fixed point in time
4. Prepare various projections including best-case and worst-case scenarios for your circumstances. This way you can forecast your position several weeks or months into the future
5. Be conservative. Be conservative with your forecasts, be conservative with your expenditure (reduce all unnecessary expenses) and be conservative with your team
6. Set key milestones for action. If this happens, then do this. For example, if your revenue drops 50%, you must remove 2 wages
7. Monitor your position daily. Are you on track or off track against your forecast
8. Protect your margins. Discounting is a race to the bottom, and you need to avoid doing it to create cash flow for as long as you can. To understand the discounting trap you should be aware that if a business that generates a 30% gross profit on the sale of its goods or services drops their price by 10%, it must generate 50% MORE sales to maintain the same level of profit!
9. Daily invoicing – get your jobs done and your bills out every day
10. Have a diligent system to collect your debts. During the GFC we saw a huge increase in the amount of small business bad debt. You need to be on top of this regularly. Remember, you make the rules with your customers – you enforce the rules!
11. Reduce surplus assets. You can do this by reducing stock levels or by selling surplus plant and equipment
12. Where practical, stretch your supplier payments. Be careful doing this however to stay on good operating terms with them (remember, they may be in the same boat as you)
13. If you are struggling with payments don’t adopt what I call the ‘Ostrich Syndrome’ and stick your head in the sand. Your silence is not golden – get on the front foot and communicate.
14. Speak to the bank to explore what options may exist to reduce loan repayments and get access to additional funding
15. Get advice. Remember, you are not in this alone. Speak to your advisor

Contact us on (08) 8172 1444 or enquiries@altitudeadvisory.com.au for tailored advice to suit your circumstances.