The COVID-19 pandemic hit suddenly, causing upheaval to all parts of the economy—and particularly, small businesses. Many businesses were left with uncertainty and risk as customers stayed home. Add in trying to figure out if your business qualifies for federal and provincial support, worrying about employee safety and you've got a problem that many small business owners are faced with - cash flow management issues.
Why cash flow is important during a pandemic
Cash flow is the amount of money moving in and out of a business, often measured during a set time period. The ideal model is to have more money flowing into a company versus out of a company. Positive cash flow adds value to a company, lets them buy new assets, negotiate deals with vendors and suppliers, hire top talent, spend on research and development, and plan for and invest in future growth.
The pandemic is a ‘black swan’ event, something that is extremely rare, unexpected and has a devastating effect on the global and Canadian economy. As businesses look to minimize risk and uncertainty, keep their employees safe and figure out how to maintain their supply systems, having a defined cash flow management system that factors in the pandemic is key.
How to manage your cash flow
Revisit your cash flow forecasting
Revisiting your cash flow forecasting can help you understand how much money is flowing in and out of your business currently, and how much cash you'll have at the end of the month. With the pandemic, businesses may want to forecast their cash flow on a monthly basis. This should include all your projected income and outgoing expenses. It should also include whether you have deferred any rent, tax or credit payments.
Manage and expedite receivables
Expediting receivables means changing how you get paid—so you can get paid faster. Some options for expediting receivables include:
- Shortening the payment period (from 45 to 30 days).
- Instituting an invoice upon delivery or completion of goods or services instead of billing on a monthly basis.
- Asking vendors and suppliers to provide preauthorized cheques so you can draw on their accounts upon completion of services.
- Going digital so you don’t have to wait for cheques in the mail.
- Offering a discount so you get paid quickly.
Audit payables and receivables transactions
Some places to start with auditing payables and receivables include:
- Reducing any discretionary spending such as free coffee or snacks.
- Reducing unnecessary inventory if it’s not in use.
- Imposing a temporary hiring freeze and even reducing labour costs via voluntary furloughs.
- Ensure you’re paying the right amount for your goods and services and collecting the full amount for what you sell.
- Ask yourself some questions: are you overpaying for your products? On the flip side, are you taking full advantage of any rebates, discounts or subsidies offered to your industry?
- As a short-term solution, you can consider extending your payment period to your suppliers, so you have more cash on hand.
Prioritize existing stakeholders and keep the lines of communication open
Communication, especially during a global pandemic, is more important than ever. Start by identifying your business’ key internal and external stakeholders. Create and deploy a communications plan that identifies the issues, the plan to resolve them and their role in the process. Communication like this will enable you to manage your information and reduce the impact of negative or false information, and keep your messaging consistent across all channels.
Leverage unsecured credit
If your small business needs cash, you can look into leveraging unsecured credit. This can be used to help businesses manage day-to-day operations such as payroll, rent and inventory.
Here’s how it works: a small business owner borrows a specified amount and it’s paid back from incoming cash flow to the business.
Some other benefits of a business line of credit include lower interest rates and flexible payment options.
Once you have a business line of credit, it can be used, paid off and reused as needed. This is a good option for businesses that have seasonal cash flow ebbs and flows.
The long-term effects of COVID-19 on the economy and small businesses are uncertain but its effects should be considered in any small business’ forecasting and risk assessment. This may help your business develop options that will allow you to continue to operate during periods of crisis in a way that doesn’t put your business, employees and other stakeholders at risk.
This article is intended for general informational purposes only and does not constitute legal advice or an opinion on any issue. It should not be regarded as comprehensive or a substitute for professional advice.