24/09/2020

Protecting and understanding your cash flow during times of uncertainty

Cashflow is king

For any leader in business, they will know that right now, we are facing uncertain times. There is no expiry date of when this will all be over and things go back to normal, and there is a lot of uncertainty as to what ‘normal’ will even look like when things resume some kind of normality. As someone who leads the business, there can be a pressure to know what to do, but if you’ve never experienced anything like this before, it can be hard to know what is best to do, to protect your business, and to protect your employees, and your cash.

Cash flow is often described as the lifeblood of any business. In order to be profitable, then cash flow makes a difference, and in the short-term, is often more important than making a profit. When your business is small, it is about getting into the black as soon as you can, which is why you need to have a solid cash flow in place. The money that is coming into your business, your cash flow, means that you are able to cover the payments that you have to suppliers and employees, and you can cover the costs of any overheads, as and when they are due. While being able to manage your business cash flow and finance, and doing so well is a critical part of running a business, when things are uncertain, it is something that is vital, more than ever. 

Managing your cash flow means that you can forecast how things are going to look in the months ahead, as well as ensuring that you have enough that will be there in order to pay your bills and invoices as and when they are due. Managing your cash flow well will also ensure that there is sufficient cash to be able to deal with those times when you don’t get paid as expected. Cash flow can stop at certain times in the life of your business, particularly at the moment, which just adds to the levels of uncertainty.

When you are on the receiving side of late payments, or non-payments, then it is a risk to the business. At the moment, though, we have an increasingly challenging landscape that is now more likely than ever going to mean problems with cash flow and problems with customers or clients being able to pay your business on time. 

Late payments are something that can be common in a lot of business sectors. But a lot of businesses are not going to be used to managing cash flow in times like this, when things are so uncertain. You might find that some normally reliable clients now are simply unable to pay, because of the uncertainty that it has caused to their business. Of course, this has a big impact on you and your business, which can lead to some disastrous effects if you are not prepared.

Dedicate someone to manage cash flow

As a business, it is important to understand the cash flow of the business and where you stand. If you don’t already have someone in charge of this specifically, then in uncertain times, is definitely the time. If you have a member of the team who is in charge or tracking money in and money out, then it can be vital, especially when things are a lot tighter than they have ever been before. If there are any problems or issues then they can be looked at and assessed before they become too much of a problem.

Protecting your company and understanding cash flow

We can see businesses dealing with difficult financial situations when there is no cash flow or good cash flow forecasting in place. In a lot of cases, there is an improvement that can be seen when there is a cash flow forecast which shows where any potential pinch-points may be. When this is in place, it helps to highlight what is needed, and where a more robust strategy can be implemented so that those pinch-points aren’t something to hinder the business in a big way.

Having an initial idea of cash flow forecasting can be something that can be put together through an assessment of the business’ current cash flow, through close analysis of bank statements and invoicing. This can then be used going forward, to help the careful assessment and monitoring of cash flow, against what has been forecasted.

This is something that will need to be refined more and more, by understanding the different variants that can impact the forecasting, and looking at the input from the business, through a variety of areas like sales, finances, and procurement. The more that you know about your business and its pinch-points, where things are going to be tight, the more that you will understand and the less likely you will be to completely run out. You will give yourself some more time to deal with things, which can be a massive help. 

Along these lines, you also need to think about analysis and sensitivity analysis. This is where you answer some questions about what is going to happen, should some particular things change or happen. If you can answer some of the following, then it can help you to plan for the future, as things can and do happen. As well as planning for the best with your business, you need to prepare for the worst and have strategies in place.

Think about what would happen if you don’t get a big payment on the date that you are expecting; what would happen then? Will the business be able to survive if you don’t get a large order that you thought would be coming through? What will you do if the costs on a project escalate or the time that it takes grows? How will you cover those costs for the extra staff to complete it, as well as any extra materials? Do you know what the point is in your cash flow where you could be at risk of being able to make your own payments when payments are due? When you know the answer to this final point in particular, it can really help you know exactly what to look out for, and take steps to avoid this, before it happens.

Reducing the risks

When you have a forecast or a plan in place ahead of time, then it can help you to reduce the risks that are associated with your business, which is important in the challenging times that we now face. If the worst does happen, then you will be working with a formulated strategy, that you would have put together ahead of time, that can help you. Your plan will also have been designed to help you with the risk areas of your business cash flow and assessed various things that could happen with business and trading conditions.

When there is some testing time ahead, as they are at the moment, one of the only certain things that we have is that we know that it will be uncertain. As such it is so important to ensure that your business is in a good position to be able to deal with what could potentially come in the coming weeks. There are daily and weekly changes and decisions from the Government, particularly around small businesses and the funding and help that is being made available so that business can carry on as usual, once things return to normal. It is still so important to make sure that you have looked at all options, and make sure that they are explored and looked out in relation to your business, as some things may not be relevant, or may not be needed.

Keep the bank informed

It can be a vital part of the process to keep your bank informed of what is going on with your business, what has happened, and let them know about the changes in your income and outgoings. Then there are no surprises for either of you. If you speak regularly to your bank it will help as they can be a source of support, especially in uncertain times, which can help you to take the pressure off slightly, and keep the business running effectively. They are likely to put things in place to help, such as no-interest during the uncertainty, and so on.

There are definitely elements that are going to be out of your control at the moment, which is so hard when it is your business, or you’re a leader in business, and you normally know exactly what is going to happen and when. There is so much out of our control that it can be tough. But if you are able to have your business be in a position where it can weather the uncertain storms that are coming, and be able to withstand what the future holds, then it can help with the longevity of your business, regardless of what goes on in the wider environment in the next few months.


Also published on Medium.

Written by
Scott Dylan
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Scott Dylan

I’m Scott Dylan, Fresh Thinking Group Founder and Partner. I oversee the strategic direction of the company, which I created to help, acquire and invest in both distressed and viable companies together with helping businesses improve their business processes and setting strategic directions.