Managing cash flow in a crisis

June 4, 2020

By Steve Campana, CPA, ABV, CFF^®
Partner

The COVID-19 world pandemic, which has shut down, modified or partially closed businesses across the country and world, has magnified the need for all businesses to anticipate and project their expected cash flows on a weekly basis.

We find it helpful to understand managing cash flow through the Assess, Adapt and Align (AAA) lens of the six tenants of successful business planning model across several areas. We find the acronym $COPE representing - financial, customers, operations, people and end in mind helpful when thinking through various areas of your business.

Know who you are

Do you know the story your financial statements and cash flows are telling? A profitable company doesn't always convert those profits into timely cash flow. To get a clear picture, consider the following actions:

Separate fixed and variable expenses: Understand how your variable costs, such as those related to product/service transactions, and your fixed costs, like utilities and payroll, factor into your net profit.

Know your break-even point: This will tell you the sales volume needed to cover your variable and fixed costs - your break-even point.

Understand your liquidity and working capital: Knowing your business' working capital trends as a percent of your sales is helpful to accurately project cash flow. In other words, what is the percentage of your working capital (current assets minus current liabilities) divided by your sales. How might this change over your projection period?

Read your hunger measure: How hungry is your balance sheet? How much working capital is tied up per dollar of revenue? Excess working capital might present a source of cash in a time of need.

Create and analyze a longer-term common size financial statement: Unlike typical financial statements, common size financial statements lay out a longer time period - ideally five years to start - and illustrate your business' financial story. This allows for a year-over-year comparison to see how periods of decline and growth have affected overall profitability and cash flows and can provide valuable information to assist with the assumptions used in your cash flow projection.

Know your cash conversion cycle: Understand that a sale doesn't mean cash, and inventory is potential cash, not cash. Know your inventory turnover, days of sales in accounts receivable, and days of cost of goods sold and/or operating expenses in your accounts payable. Use this information in building out your cash flow projection model.

Assess where you are

You can now assess where you currently are and where your revenue and expenses might be vulnerable. What activities can be suspended temporarily, reduced or eliminated? Where are the opportunities to pivot to something different? Finally, use this time to understand and strengthen your relationships with customers and vendors. What might they need from you at the end of this period and how might that be different than how you are currently interacting?

Keys to understanding where you are:

• Assess current levels of working capital and cash reserves.
• Review existing line of credit availability and long-term debt.
• Ensure existing credit facilities are adequate.
• Share your outlook, plans and financial statement and cash flow projections with your financial institution.

Understanding your cash flow on a week-to-week basis will help you see more clearly at what point you might have a cash flow squeeze, borrow against or run up against existing credit line limits and in which weeks you could experience negative cash flow from operations. Timely cash flow projections can help you monitor your cash flows and assist with making informed adjustments and decisions before you hit the low points.

Finally, run through these exercises to adapt your cash flow to mitigate some of the risk. You'll want to analyze:

• Your potential customer behavior during this time and how it might affect sales.
• How you can increase sales and/or reduce accounts receivable days to improve cash flow.
• Where you can adjust expectations with suppliers and vendors.
• If adjustments to your work force are necessary - consider working from home and shift/job changes first before moving to layoffs and furloughs.
• Measure twice, cut once. Thoroughly consider all your options before making big decisions that impact both your business and your employees.
• Keep the end in mind. What critical resources will you need at the end of this period to successfully assist your customers, people and communities
• Ask your customers and vendors how you can be of the greatest assistance to them during and at the end of this crisis.

Now is the time to decide and act ahead of the bottom of this cycle for your company. This challenge might last for several months,. Each new week and month will bring new circumstances to which you'll have to assess, adapt and align.

Anticipating and projecting your expected cash flows rather than waiting for actual results can help you adapt and make more informed decisions in response to what is happening as opposed to reacting to what has happened.

This article was previously published in the Tri-State bizTimes.