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Managing your business’s cash flow

Mar 17, 2020

Cash is essential to the health of your business. It’s the accelerator that not only enables growth but also ensures the business’s very survival.

Managing cash flow can be the difference between growing and surviving. And during challenging times, like what businesses are experiencing with the COVID-19 coronavirus, it’s the difference between surviving and failing. To help business owners navigate cash flow, especially in periods of uncertainty or crisis, here are three big steps to cash flow management:

1. Review and monitor your cash flow

In business, most costs are predictable. Labor costs, vendor payments, overhead — you generally know what you have to spend every month.

The first step to cash-flow management is performing a cash flow analysis to officially identify what these costs are, how much they are and what cash you’re taking in. Make sure to look at your different types of financial statements.

You probably focus on your monthly profit and loss statement to indicate the health of your business, but this tells you what yesterday’s cash flow was. Looking at the balance sheet, in addition, helps you understand what tomorrow’s cash flow will look like. It’s why banks look at your balance sheet to determine your business’s ability to repay loans and the likelihood of its survival.

Plus, certain balance sheet accounts could help build long-term stability, and turning those non-cash assets into cash is critical, especially during challenging times. All assets should be looked at with the lens of how they generate cash. Spending cash on slow-yield items won’t help your business grow or be able to meet its current obligations.

In addition to your income statement and your balance sheet, you should also review your cash flow statement. It can help you understand how cash moved over a specific period. It shows cash inflows and outflows, tells you how much cash you had at the beginning versus the end of the period and shows how much cash you collected versus how much you paid out. It also separates cash flow into three categories: cash flow from operating activities, cash flow from investing activities and cash flow from financing activities.

Viewing the income statement, balance sheet and cash flow statement together can give you the full picture of your business and the state of its cash.

2. Assess risks to cash flow

Cash flow should always be a part of your business’s risk assessment practices. Equally important is assessing risks to your cash flow. There are several common risks:

Customer base: If a large part of your sales come from a few customers, that puts you at risk because those customers have a significant impact on your revenue and thus your cash flow. If one or more of those customers discontinues business, it’s going to have a hugely negative impact on cash flow.

Supplier network: It’s like that your business relies on a few key suppliers for raw materials used in production or in products resold to the consumers. Relying on a few key suppliers increases the risk of the business because any disruption to those supplier relationships reduces your ability to fulfill orders and stock inventory, thus reducing cash flow. 

Debt levels: Higher levels of debt mean you’re spending a lot on interest and don’t have as much cash available, which is a business risk. However, being able to forecast repayments of principal and interest is helpful in cash flow management. Business with fixed-rate debt have some automatic stability in the expected cash flow for these obligations. 

Businesses with variable-rate debt experience a reduction in cash flow when interest rates rise and an increase in cash flow when interest rates drop, making it critical to understand the impact this type of debt has on your cash flow and your ability to meet obligations such as payroll.

3. Fix cash-flow issues

One of the most common cash-flow issues is the slow influx of cash. Your business’s payment practices and your customers’ payment practices both factor into this. 

If your business likes to pay bills quickly, understand that this is negatively affecting your cash flow — and that the issue is only compounded if your customers are slow to pay you. You can even this out more by setting standard terms across your accounts payable department for when you pay bills.

If your customers routinely pay several months out, adjust your price or payment terms accordingly. Set standard terms in your accounts receivable department so that there are firm expectations for when cash will be incoming.

During times of uncertainty when you need to keep cash flowing, you could incentivize customers to pay sooner than usual by giving them a discount.

During a significant supply chain or labor disruption, if resources are harder to come by, you could work with customers to understand what orders they need now and what orders can wait until after the disruption is over. This has the added bonus of incentivizing customers to pay for those orders they need, as well as freeing up resources to focus on other customers’ high-priority orders.

Throughout any crisis like COVID-19, your view of the future shortens, and it becomes about short-term survival rather than long-term growth. Transparency with your employees, customers and stakeholders, and a commitment to helping customers help you, can be keys to getting your business back to the basics and surviving this period of stress and uncertainty.


Tony J. Battaglia, CPA, MBA
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