3 Important Cash Flow Lessons from COVID-19 to Help You Move Forward
In the last blog, we spoke about the importance of having a financial expert on your team that knows your numbers intimately and who CEOs can rely on to assist in making critical decisions.
Recommended: The Most Valuable Asset for Your Business During COVID-19 is a Financial Consultant
Here are 3 more lessons that COVID-19 aka“Rona” has taught business owners.
Use them as you figure out what’s next.
Revenue is Vanity. Profit is Sanity. Cash Flow is Reality.
Popular startups tout revenue and sales number that shoot through the roof and we reward them by buying more of the products and services they offer. The thought is that if customers are running to them in droves, clearly, they have a great products or services, a great brand, and therefore a great company.
That is not always the case. We have seen many large brands who start with huge sales numbers, but it doesn’t trickle down to the bottom line. That’s the vanity of it all.
But when a business is churning efficiently and can report profit margins that meet or exceed the industry average, that is the true test! As a CEO, it’s sobering to know that you have profits that can then be reinvested in the company’s operations or invested in its growth – talent, equipment, acquisition of a competitor.
Profit margins is one key performance indicator of the health of a business and gives the CEO guidance on what next steps to make.
Cash is King, Savings is Queen!
While it’s great to have sales and more importantly profits, Cash is King! It’s the lifeblood of every company, the oil that keeps the business engine going and the #1 reason most small businesses fail.
We have to do all that we can as businesses owners to stretch and protect our cash and in good economic times, save some of that cash for a rainy day. If you were wise enough to have a rainy-day fund, I’m sure it’s coming in handy now.
I used to recommend businesses and even individuals save at least three months of expenses in an emergency fund. This pandemic has shown us that 3 months of savings is not enough. The new standard is to save at least 6 months’ worth of expenses. It’s a lofty goal, but it is doable.
When Managing Cash Flow, Prioritize Needs Over Wants.
Cash should not be spent on WANTS during times like this. Cash flow management needs to be a critical part of your company’s risk management and planning policies.
Actively evaluate your cash flow requirements, develop various scenario analysis to identify possible cash shortfalls and list simple as well as aggressive measures to preserve and increase cash. Here are a few measures:
§ Talk to your key customers, referral partners and suppliers – know what they’re dealing with and the financial risks to your business.
§ Review all contracts with customers and remind them of their terms. This is a perfect time to review client contracts and revise your collections process and terms as well.
1) Offer discounts to customers who can pay sooner.
2) Offer discounts to customers who are open to paying in advance.
§ Revisit, reduce and renegotiate your variable costs. It’s the quickest way to reduce cash flow than focusing on fixed costs like rent. Review your business interruption insurance to see what it covers and what specific situations it excludes.
§ Regarding reducing labor costs, start by reducing contract labor and re-distribute work to the permanent workforce. Encourage employees to take available paid leave, reduced hours or (in)voluntary leave without pay.
§ Do scenario planning to understand how much cash you’ll need and for how long. First, assume you’re paid what you expect from clients within a month. Look at what happens if 50% or 25% of that actually comes in
§ Look at non-traditional revenue streams – if you sell locally, how can you reach a national or global market?
§ Shift your focus from the income statement to the balance sheet which means instead of just focusing on sales and how that translates to profits, focus on extending bills and accelerating the rate at which you turn invoices (accounts receivable) into cash. Use a balanced approach. Your vendors and customers are probably thinking the same thing so work with each vendor and each customer to come to a mutually beneficial agreement.
§ If you are a product-based company, have excess finished goods inventory, focus on churning that out to also bring in cash. But, use a balanced approach as this pandemic may disrupt your ability to get more raw materials and ingredients to make more product. It’s hard to know the right balance but it’s critical you find it.
§ If you have equipment that can be rented or any other assets, figure out alternative ways to use those assets to generate alternate sources of cash.
Think of this like a checklist for responding to the immediate business crisis of cash flow.