This article discusses the following ways to avoid cash flow problems:
In this article, you will learn:
Much like an outlier event, the COVID-19 came as a surprise to all the world economies. As the world economies report increasing cases of COVID-19 day after day as the virus spreads globally, it has come to take a hit on various communities and supply chains across the globe.
Businesses are now laying emphasis to protect employees, recognize the risks attached to their businesses and manage the supply chain disruptions caused by measures taken to control the COVID-19 spread.
Though the final effects of COVID-19 on businesses as well as supply chains are yet to be witnessed, one thing is certain that the Pandemic will have global financial and economic consequences that will ultimately impact supply chains from start to finish, that is, from raw material to final products.
One of the consequences of these supply chain disruptions would be cash flows taking a hit.In this, businesses having low or unstable cash reserves would be the ones that would be badly hit.
Not only that, but businesses with sound cash position too also stand a chance to get impacted depending upon the time it takes for demand and supply to return.
This article talks about the ways in which businesses can avoid cash flow problems arising due to COVID-19.
Design a Short-Term Business Survival Plan
Businesses that will withstand this pandemic will be the ones that will evaluate these current uncertain circumstances, identify unique patterns as well as opportunities and act immediately to reorganize the business.
As per Harvard Business Review, a company’s survival in this downturn would be nothing but the product of speed with which it understands the situation, the amount of cuts or life-saving choices that the business makes and the speed with which it implements the changes.
Thus, one can say that the survival of the business and its future is dependent on the agility with which the entrepreneurs take decisions and implement them.
So, the short-term survival business plan must include assessing the outside as well as inside environment of the organization. The external environment study would include assessing the situation of the economy, the soundness of the target market, new opportunities and the forecasts with regard to recovery.
Whereas internal assessment would include the liquidity position under the worst case scenario, the current sales pipeline as well as the forecasted sales, accounts payable, accounts receivable, variable expenses such as payroll, outstanding debt, sources of capital etc.
The ultimate goal of such an assessment is to be open with the idea of slowing down the business during such crisis. Such an assessment will help you to make accurate cash flow projections and understand how slowing down will impact your business.
For example, a bakery owner can undertake steps such as adopting strict hygiene standards, making home delivery of bakery products, collaborating with online vendors for uninterrupted supply etc.
Pay Attention To Cash Conversion Cycle
During normal circumstances, businesses majorly concentrate on increasing sales and improving profits. They typically are complacent about tasks such as collecting receivables, paying bills etc.
In severe situations like the one faced during Pandemic by the businesses, it is important that attention is shifted from increasing revenues and profits to three important components of working capital: accounts receivable, accounts payable and inventory.
Therefore, in order to reduce the need for increasing working capital, businesses should collect accounts receivables early and delay paying bills payable in addition to managing inventory.
Delay Bills Payable Wisely
As mentioned above, one of the ways to keep your working capital intact is to delay payments to your suppliers. Some companies may take the decision of taking longer time to pay their suppliers on their own without considering the impact such a decision would have on other suppliers in the supply chain.
As a result, they may force the decision of delayed payments on their suppliers thereby leading to an approach that could hamper relationships with important suppliers. Not only that, but such a decision would also leave the suppliers with insufficient cash due to which they would not be able to continue the operations.
This may lead to further problems such as quality issues, late deliveries and strained relations with important suppliers. It is therefore necessary that businesses involve suppliers in the supply chain while taking such decisions and come to an agreement which is a win-win situation both for the business as well as the suppliers.
Not only that the business might have to speed up the payments to its suppliers so that suppliers get the requisite cash to maintain the supply chain and stronger relationship with critical suppliers
Accelerate The Receivables
Businesses are complacent about receivables during times when the economy is flourishing and cash flow is not a problem. However, with COVID-19 Pandemic disrupting the supply chains world over, cash flow management has become one of the important aspects of business.
The way you are thinking on taking longer time to pay your suppliers, similarly your customers too can make a delay in paying you. Thus, it is important that you accelerate your accounts receivables and pay attention to the customers who are planning to alter their payment process during the Pandemic.
In addition to this, ensure that you are raising invoices in time so that there is no delay in getting payments from your customers. Being relaxed in respect of invoicing can result in a heavy cost for your business.
Work On Variable Costs
One of the quickest ways of reducing cash outflows during severs situations like the Pandemic is reducing your variable costs instead of concentrating on fixed costs.
There are a number of variable costs that you can work on such as reducing travel expenditure by exercising travel bans, limiting unnecessary meetings, temporarily ceasing hiring and putting limitations on voluntary spends on entertainment, training etc.
In case of businesses where labor has a lions share in costs, figure out areas that can help you reduce your expenditure and avoid layoffs. For instance, such businesses can reduce contractual labor and get the same work done from permanent employees.
Such businesses can also motivate employees to avail the balance leaves which may result in reducing liability. Additionally, they can also think of providing voluntary or involuntary leaves without payment to employees so as to keep cash balance intact.