Managing Business Cash Flow During a Crisis

Early in 2020, we were hit with an international crisis that most businesses were not prepared for. As COVID-19 swept through countries, quarantines and stay-at-home orders created economic stress that caused many business revenues to tank–or even cause full-out closures. While the international economic turmoil due to the panic is unique, experiencing a cash crisis is something many businesses will face in their lifecycle.

7 Steps for Managing Cash Flow During a Crisis

While some cash crises, like that of the pandemic, are sudden, many cash crises can be identified early. Dealing with a cash crisis shouldn’t be a hard and fast reactive process. It’s important to be strategic and methodical. Making too many cuts or making them in the wrong places can prevent you from recovering in the future, while making too few can prevent you from resolving the problem, exacerbating financial stress.

Below are 7 steps businesses should take to manage cash flow during a crisis.

Step 1: Have a Good Cash Flow Plan in Place

The best way to prepare for and avoid a cash crisis is to have a good cash flow plan in place. A cash flow plan should include a best case, worst case, and expected case scenarios. These should be a rolling cash flow plan that becomes your monthly or quarterly budget. Hopefully, your business will travel along the expected or best case cash scenario, but if a worst case scenario does arise, those numbers are ready and available to implement into your budget.

If you do not have a good cash flow plan up to this point, it’s essential to create one right away. Sometimes a basic cash flow plan can be sufficient in advising cash cuts, but many companies will benefit from a more detailed, strategic cash flow plan.

Your cash flow plan should state your current and projected revenues as well as accounts receivable and accounts payable. This will initially give you an idea of the amount of “runway” you have left (or the amount of time you have until you run out of cash). This should give you an informed baseline for making cost cuts that will allow you to see the short- and long-term impact of these cuts.

Step 2: Analyze Your Revenues

Revenue is a key area to cash flow since it accounts for most of the money flowing into your business. When you’re looking at your revenues, it’s important not only to analyze where revenues may be increased, but also where low or nonexistent profit margins may be hindering your cash flow. Look for opportunities to:

• Turn excess inventory into increased revenues
• Discount goods or services to increase revenue flow
• Adjust product line to reduce low-profit goods and increase higher-profit goods
• Look for opportunities to adjust product line to fit your current resources and client demand

Tip: When discounting goods or services, be sure the increase in revenue exceeds the decrease in profit margin.

Step 3: Strategize Your Accounts Receivable

In some cases, you can increase cash input by strategizing your accounts receivable. You should always know the financial status of your clients and when/how you can expect payment. If you are in a cash crisis, you may sometimes be able to negotiate accounts receivable for a faster influx of cash. You can do this by:

• Applying more pressure for collections of overdue payments
• Loosen payment terms or offer payment plans to customers who are having difficulty paying
• Offer discounts for faster payment

Be sure to reflect changes to your cash plan. If you push prepayment, make sure this won’t affect your revenue stream down the line or that you have a plan to compensate for it. If you renegotiate payment terms, make sure to reflect the updated amounts in your cash flow.

Tip: It’s almost always less expensive to keep an existing client than to be put in the position to have to replace that client.

Step 4: Identify Your Financing Options

It’s highly advisable to always have a credit line in place, even if you don’t need it. The best time to make sure you always have cash or credit available is before you enter a cash crisis. If your business is experiencing a cash crisis, this is most likely to tap into your line of credit or other financing options.

A key to doing this successfully is to use your cash plan to identify how much, exactly, you will need to extend your runway, and to have a solid plan in place for what to do with those funds once they are available. Short-sightedness often has business owners looking at financing options as a “quick fix” for payroll or accounts payable. However, while this temporarily covers the problem, it does not resolve it. Financing should instead be seen as a strategic infusion to fuel recovery from your cash flow crisis. The best use of the funds may not actually be paying off all your accounts payable.

Step 5: Review Your Personnel Costs

In most businesses, payroll and benefits are the largest expense in the company. It’s also the most difficult part of making cash cuts. When reviewing your personnel, remember that it is better to be the business who stays in business while employing some of its employees than to be the business who goes out of business while retaining all of its employees.

You should have an idea of which of your employees bring in or support the revenues and which employees may be “nice to have” but may not be essential to your core business performance. Use your cash flow plan to balance the cuts you need to make while keeping those employees that will ensure your business still continues to function. Your goal is to trim costs as much as possible while avoiding trimming revenues or being put in a position where your business will not have the facility to recover.

Tip: Look at this as an opportunity to improve your business. Perhaps you have underperforming employees that should have been let go prior to the cash crisis; now is the time to make cuts that hone and strengthen your team.

Step 6: Review & Negotiate Accounts Payable & Expenses

After you look at your personnel costs, take a look at your accounts payable and expenses. This is an area that can be the difference between failure and success during a cash crisis. Many business owners get caught in a “to pay or not to pay” scenario when the actual approach can be much more strategic.

1. Cut unessential expenses immediately. Cut early and deep. The sooner you cut, the longer your runway will be.
2. Prioritize your accounts payable. Which are critical to driving revenues and cash receipts? Pay these first, but don’t pay them faster than you’re required to pay them. The more cash you have in-hand, the more you can continue having that cash work for you.
3. For those lower priority accounts payable, how many days in your payment cycle are still available? Negotiate extensions when possible, as long as those extensions don’t come with interest that will dig you a deeper hole.
4. Negotiate better terms with your vendors. Most vendors will be willing to work with you if you provide a clear and reasonable plan. Most rational vendors know that their best chance of getting paid includes helping you stay in business long enough that you can pay them.
5. Some vendors may offer a significant discount for immediate payment–but this may not always be the wisest option. Prioritize and make sure the cash you would pay would not be better spent elsewhere.

Tip: Don’t let each department be in charge of their own cash cuts. Asking the manager of your different departments to be in charge of cash cuts is not advisable. Not only do you risk “pet projects” being prioritized, but the final cuts also may not support the overall strategy of the company. Your cash flow must cohesively work together to be most effective. Strategic cuts are best made by a financial expert without a personal bias in one or multiple departments.

Step 7: Review Your Sales and Marketing

A common mistake during a cash crisis is to cut sales or marketing budgets since they can sometimes seem like the “easiest and fastest” cuts to make. However, these are the cuts that will slow your revenues the most. Decreasing the outflow of your cash can never save your company if you’ve also cut off the inflow. Be smart about your sales and marketing cuts, and make sure the cash you do have is being invested in the right ways.

How can we help?

Preferred CFO is an outsourced part-time CFO firm offering high-level strategic CFO services to small- to medium-sized businesses. If you are experiencing a cash flow crisis, contact us today to talk with a CFO for a free consultation.

About the Author

Jerry Vance is the founder and managing partner of Preferred CFO. With over 15 years of experience providing CFO consulting services to over 300 organizations, and 28 years in the financial industry, Jerry is one of the most experienced outsourced CFOs in the United States.

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