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Managing Cash Flow During the COVID-19 Pandemic

Toppled penny jar

All good businesses should be used to budgeting and managing their cash flow. Every textbook will outline how budgeting can be performed and the benefits. A cash flow forecast is featured on almost every business and finance course.

Clearly, there is a lot to be said for producing regular cash flow forecasts at any time and the benefits of producing one would include:

  • Ensuring a business doesn’t run out of cash – clearly workers and suppliers will want paying promptly.
  • Avoiding the need to borrow at punitive interest rates
  • Ensuring that the business doesn’t hold too much cash

Given that most of the developed world is now in deep recession – one that makes the 2008-9 recession look like a mere blip – businesses will fail. Business failure is likely to be at record levels for 2020 (and possibly 2021).

Therefore, it is vital that businesses take steps to avoid their own problems. Given the shortage of cash is often cited as one of the main causes of business failure, this is where we'll focus on looking at some simple advice that businesses, if they are not already, should consider.

Managing cash flow in a crisis

COVID-19 has and will continue to wreak enormous damage on the world economy. Even at the start of the crisis, no one would have foreseen how widespread this might be on the world economy. As we move towards the latter part of 2020, we are still unsure how long this will continue.

The impact of the crisis on business has been immense. Some believe that things have permanently changed, that we are currently witnessing a seismic change that will mean the business world will never be the same again. Others argue that, although a disaster for both people and for the economy, the world will eventually return to normality – perhaps later if not sooner.

Whichever scenario unfolds, the impact of the crisis can be examined in terms of how business can attempt to budget for this sort of crisis. In many ways, some businesses will struggle to survive at all, and attempting to budget their way through this period is akin to shuffling the chairs on the deck of the Titanic.

However, many (most?) businesses will come through the other side intact. This is where budgeting and management of working capital can help – a business that may otherwise fail in this period that budgets carefully may be able to save itself. In this case, what are the key lessons for a business in terms of cash flow management?

Getting budgeting done

Burying one’s head in the sand may be tempting during a crisis period – especially one that is so severe and unpredictable. However, it is important that a business constructs budgets so that it does have a plan.

Even if the plan happens to be far too optimistic as events unfold, at least it was a starting point and provided focus for what needed doing. Start with likely sales for the next few months (or weeks), and from that begin to estimate the likely production needs, the likely purchases, and from this the cash requirements of the business.

Focus on cash flow

Although it may be the sales forecasts that drive all other budgets, the key budget for most businesses is the cash flow forecast. Even in normal times, it is the shortage of cash that often spells failure for businesses.

Ensure that an estimate of the cash needed for expenditure, and the cash likely to be coming in from sales, is available. Ensure that this is a reasonable realistic estimate - perhaps produce multiple cash flow forecasts based around different scenarios.

A simple ‘optimistic’ and ‘pessimistic’ forecast may at least give some ideas of what could happen. Of course, things could turn out far worse.

Cut costs

Many business theorists would suggest that too many UK businesses focus on the short-term and do not spend enough money on long-term investment that will add value to the business – staff training and innovation often being identified as areas where the UK has a shortfall.

Certainly, spending on these can give a business a welcome competitive edge. However, in terms of crisis the short-term becomes all-important. As the Economist Keynes said, ‘in the long-run, we’re all dead’.

Businesses must be able to identify areas where savings can be made. This could involve reducing areas of spending on luxuries such as business travel (easy to sort during lockdown!), or hospitality and other perks. Less obvious areas may be where a business switches to sale and leaseback – where assets are sold and then rented back. Once out of the crisis, these can be addressed but the vital concern is making sure the business survives through the crisis.

This may also involve switching from historic budgeting to zero-based systems – where each item of expenditure has to be scrutinized and justified before it is allocated. This can be time-consuming, but the opposite would be to rely on previous periods for setting the current budget. Historic budgeting will always be easy but clearly relying on last year, or even the very start of this year, for forming estimations for incomes and expenditure would be very unwise for nearly every business.

Arrange contingency finance

Even if the cash flow forecast suggests that the business will not run out of cash, it is always sensible to arrange access to emergency finance if necessary. Does the business have an overdraft? If so, can it be relied on? It is worth checking with the bank to ensure any overdraft that already exists will still be available. Extending the overdraft perhaps to match the most pessimistic projections from the cash flow forecast would be a sensible idea.

If credit terms are taken from suppliers, it will need to be checked if this is going to be continued in the future. Almost all businesses’ will be under pressure and will be trying to bolster their cash flow.

Cutting back on credit offered is one way of securing cash flows so a business that has relied on trade credit in the past cannot be sure this will be allowed in the future. Irrecoverable (bad) debts are going to increase significantly as business failures increase, no business is going to see a profitable sale result in lost income when its customer fails.

Credit periods may be cut down in length or withdrawn completely. A business may need to ‘work’ its regular suppliers to see what terms it can negotiate for the credit periods that it receives, which would be ideal for providing some breathing space, but from the supplier’s viewpoint, this is a high-risk approach. A clear lesson would be not to take suppliers and the terms they have offered in the past for granted.

Search new markets

If customer numbers have fallen due to either tightening of their own household budgets or through actual enforced closure of businesses through lockdown rules, then a forward-thinking business may look to tap into new markets. This could be a combination of new customers – in the form of online sales, customers who can be reached through home deliveries, or customers in different geographical areas. For example, many international holiday resorts will have been forced to widen their appeal as various quarantine measures were put in place, in effect preventing ‘sales’ to customers in whole countries.

They say that necessity is the mother of invention, and this has certainly been the case for businesses who have changed their own business model by repurposing their offerings. Restaurants have become ‘take-aways’. Home deliveries of restaurant-style meals have proved a success and, although it may not be as profitable, have given restaurants a way of ensuring some income at least throughout the period of lockdown.

Other businesses have taken this approach further and switched production away from certain products to those in demand. Manufacturing businesses followed government advice and switched their production away from industrial equipment to medical ventilators. Distilleries producing gin have switched production to hand sanitizer, to capitalize on the shortage of the product and massive surge in demand. It is this sort of creative thinking which may ensure a business survives when faced with a collapse in sales.

Seek government support

Most governments have provided some form of financial support to businesses. Knowing the collapse in national output, governments have provided a range of measures designed to ensure support for businesses. However, a business will need to be fully informed regarding what is on offer, and to ensure that it claims for this as soon as possible.

The highest-profile of the measures on offer in the UK is the job retention scheme – widely known as the ‘furlough’ scheme. This is where the government will pay a business up to 80% of their workforces’ wages as long as the business keeps them employed but doesn’t allow the worker to perform any work for the business. This scheme has proved incredibly popular, with over 10 million workers being furloughed for some period. This scheme is gradually being wound down over the late summer of 2020 as the economy recovers.

Other measures are in place, such as support for self-employed workers (in a method similar to the furlough scheme). Business loans are available at favourable interest rates from the government. Businesses can also defer their tax bills – of course, this will still have to be paid at some point. Many of these measures have been criticized for not being generous enough, or for not providing access to the cash needed quickly enough. However, most commentators have recognized that the measures introduced have gone a long way to keeping businesses alive.

Plan, plan, plan

What are the key messages then for businesses when it comes to budgeting? Clearly, planning is a must. Even if unpredictable, a business must at least have some idea of where money is coming from and going to. Communication with those providing finance is a must – whether it be borrowed money from a  bank, or credit from a supplier.

Thinking creatively – taking opportunities that present themselves, including things that would never have been considered before – will be needed. These are difficult times - things may return to normal, or things may change on a more permanent basis. However, the first priority for any business is to make sure that it is there in the new era.