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Seven cashflow strategies

Practical ideas for businesses to remain resilient in the challenging COVID-19 economic environment from Max Montgomery (MBA 2019).

Picture of cashflow chart.

The COVID-19 (coronavirus) pandemic has forced governments around the world to implement extreme lockdown policies. Although this has helped contain the virus, the impact on their economies and, more specifically, small to medium sized businesses, has been devastating.

For business owners, the phrase “cash is king” has never been truer as they try to weather this storm. There are no magic solutions to solve cash flow problems and many businesses will require continuous incremental improvements to survive the next six to 12 months.

However, having recently consulted with a turnaround private equity firm, I’d like to share seven cash flow strategies (by no means an exhaustive list) which may help some businesses get through this crisis:

1. Make the most of government support

Invest time in understanding, and applying for, the various government grants, subsidies or tax breaks that are available in the jurisdictions your business operates in. These policies are continuously being updated. Make sure you keep on top of any new policy announcements by signing up to the relevant email distribution lists.

2. Identify, and develop, profit-making activities

Pinpoint and focus on the profitable activities within your business. (Note: these may have changed as a result of COVID-19.) This can be achieved by segmenting your business into different divisions, such as product lines or customers, and allocating revenue and costs accordingly to estimate a division’s profit. Some businesses will have to get creative to develop or pivot towards profit-making activities, such as investigating new partnership opportunities, sales channels or different service providers.

3. Focus on what you can control

Try to identify what actions you can take that will have an immediate impact on your business’s cash position. Growing your top line (revenue) is hard, especially in a tough financial environment. The main thing you have full control over at this point are your costs, which leads onto strategy four.

4. Cut fat, not muscle.

All businesses eventually get lazy and inefficient when it comes to expenses. To reduce cash outflows, identify and cut unessential costs (fat) but make sure you do not cut costs which are essential to your business strategy (muscle). One way to achieve this is by building your costs from the ground up. This involves identifying the minimum cost lines required as if someone wanted to replicate your business – in other words, what cost-of-goods sold (COGS) lines are essential and which are merely nice to have? Likewise, what staff are critical to the business, and what premises are absolutely required at a time when working from home is becoming more commonplace?

5. Incorporate your business plan into a weekly forecast financial model

Having a weekly six to 12-month forecast financial model forces you to truly understand your cash flow position. This activity can help you optimise working capital, identify additional profitable business activities (see strategy two) and run scenarios to stress-test your business – for example, how would your business perform if revenues fall 30 per cent, 50 per cent or 70 per cent this year?

6. Communicate

Keep your stakeholders informed on how your business is performing. Key stakeholders include:

Employees. Letting your employees know the full extent of how difficult the situation is, and that you have a viable strategy to get through this tough period, will likely increase motivation and make redundancy conversations easier if things get worse.

Customers and suppliers. Your customers and suppliers do not want you to go out of business. Letting them know you are having short-term cash flow challenges can be a viable strategy if communicated effectively. They may be able to assist through more favourable payment terms or alternative financing solutions. Most people will be willing to help struggling businesses if they can see an effective strategy to profitability.

Financiers. Having honest conversations with your investors and creditors allows them to better understand your situation and whether they can help. Banks are being more creative in finding ways to assist struggling businesses, and investors have been willing to inject additional capital to support their portfolio companies. Financiers will be more willing to assist if they can see that you have developed a clear strategy to profitability.

7. Keep your chin up!

 You have done an amazing job to get the business to where it is today, but events outside of your control have turned against you. You have an exciting challenge ahead of you, which you will likely remember for the rest of your life, so a positive attitude can help you find innovative solutions to your short-term cash flow problems.