Early January 2020, China announced the outbreak of a viral pneumonia infecting over 44 individuals in Wuhan, Hubei province. Months later, over 4 million individuals have been infected worldwide and almost 300, 000 were declared dead. The COVID-19 pandemic has truly pushed the entire world into survival mode. Businesses, schools, transportation, and even government offices were forced to temporarily halt operations. Now, with the prolonged quarantine, governments are faced with the challenge of balancing the interests of the health and business sectors.
Due to the threat of COVID-19, a lot of business processes have been severely affected. Although some were allowed to continue physical, on-site operations, a lot of non-essential sectors were forced to completely stop operations. This has led to a massive disruption to global economic activity, with a projected 32% plunge in global trade. Studies also suggest that over 7.5 million businesses are at risk of closing in the United States alone. According to statistics from the International Labor Organization (ILO), 2.64 billion workers worldwide are severely affected by the ongoing economic plunge. Whether it be in terms of economic security or health, the pandemic is compromising lives around the globe. As stated by ILO Director-General, “[w]orkers and businesses are facing catastrophe, in both developed and developing economies[.]”
This is why, regardless of challenges to operations, businesses must find ways to keep the world economy running. As a result of the need to innovate, COVID-19 has forced a lot of businesses to become more adaptive and proactive in finding ways to keep businesses running. For a lot of small and medium businesses, cash flow remains to be one of the most critical components in ensuring business continuity.
Understanding Cash Flow
Cash flow can make or break any business. In essence, businesses are borne out of the need to generate income. However, this requires a delicate balance between the cash going out for production and the cash coming in from profit. Without the right balance of cash flow, a business is in a sure path towards bankruptcy. If more cash is going out to production and investment compared to the profit being earned, then a lot of what is “earned” by a certain firm goes right back to business processes. It does not genuinely produce returns for the company. This problem has been one of the leading causes of business closure in recent years. For this very reason, understanding proper cash flow management is a necessity in dealing with COVID-19.
Defined, cash flow typically refers to the movement of funds within a company. There are two kinds of cash flows that every business should be mindful of:
Positive Cash Flow
– This refers to the kind of cash movement that each company strives to have. Here, the balance is tipped towards cash entering the business, rather than going out. This is when your business income completely offsets business costs. The sales, accounts, profits, etc. exceed the payables, monthly expenses, salaries, bills, etc. of a company.
Negative Cash Flow
– A business has a negative cash flow when the business is costing more than what it is earning. When this happens, a business has to properly assess their business model to see the possible remedies for their negative cash flow. These measures may include improved cash generation or reduced business processes cost.
Achieving a Positive Cash Flow
In handling a business, it is important to understand that almost nothing occurs just by chance. Although a lot of businesses hit a lucky break every once in a while, these could be considered as isolated cases. Oftentimes, positive cash flow is the key to business success. This could be done by properly analyzing, understanding, and strategizing towards the better cash in than cash out. According to the US’ Small Business Association (SBA), every month, businesses should strive to generate enough cash output to cover all the expenses for the month and for the month after that. Reaching that level of positive cash flow better ensures business security and continuity.
Although the concept of positive cash flow seems simple, this is merely the tip of the iceberg. A lot of factors come in when considering cash flow. In order to grow, businesses must find ways to improve processes and prevent stagnation. Pushing for business development will, naturally, cost cash. This is the second level of balancing businesses must do to ensure continued profitability. CPA, author, and Chief Financial Officer Philip Campbell said that growing a business puts a huge strain on cash. Businesses must first be willing to spend on smart investments to gain. Over time, investments will reveal their true nature to business owners. They can lead to a huge business loss or a catalyst for business growth and success. In fact, sometimes, a bad investment may lead to bankruptcy and closure for many small to medium businesses that are not resilient enough to deal with huge economic losses.
Assessing Your Business’ Cash Flow
The biggest business sin is not being able to identify the current condition of your cash flow. In order to properly assess whether or not your business is on the right track, Campbell suggests to ask the following diagnostic questions:
- What is my company’s current cash balance?
- Where is my cash balance heading in the next six months?
If you are unable to derive the answers to the questions above, you currently have no control over your business’ cash flow. This means that the clock is ticking, and you have to act quickly and smartly. The first thing you need to know is the current cash flow of your company. See the difference between the money going in and out of your company. Additionally, try to identify visible trends in your company’s cash flow. According to the problems identified, immediately set up business strategies to create a positive cash flow for your business.
For the best results, it would be best to track your cash flow on a monthly basis. While doing so, try to see whether or not your management is leading your company towards the cash flow you need. Create projections and strategies for both the long term and short term. Make sure you have clear business goals, and create your business plan according to the business decisions you have created with your managerial team. Additionally, you should make sure that you are able to determine when your business should pursue expansion and when it should focus on keeping income higher than costs. These are the different basics that each business needs to be aware of. However, how does COVID-19 affect the entire cash flow scheme?
Ways to Manage Cash Flow Disruptions Brought by COVID-19
Due to COVID-19, businesses of all sizes are currently struggling with both long term and short term economic disruptions. Profitability is no longer assured as low cash revenues and unstable cash flows have placed several businesses in a vulnerable position. According to economic projections, tourism, hospitality, transportation, and entertainment are currently hard-hit for the short term. Businesses in the retail, consumer, and perishable goods industry, however, are expected to sustain long term damages. What’s worse, at the moment, no one knows what the full extent of the damage will be. With COVID-19 still continually growing and with the vaccine months away, there’s no way to determine how long it will take for the supply and demand chain to return to normal.
Despite COVID-19 being one of the greatest challenges to the global economy in recent years, it is not an entirely new problem. World events in the early 2000s, including the 2003 SARS outbreak and the 2008 recession, have also severely affected the economy. That said, there are many lessons that could be taken from these past events. Ultimately, economic shifts require businesses to endure and find innovative ways to adapt and generate revenue.
Below are some pointers businesses should take note of to better cope with COVID-19 challenges to cash flow:
Establish a robust framework that can mitigate supply chain risks.
In itself, supply chain management is already a complex and delicate matter. What more when it is paired with the economic disruption brought by COVID-19? At a time like this, having an in-depth understanding of the nature of your goods and services will truly come in handy. First, you have to be aware of your goods in relation to your consumers. What are the current situations of your consumers? At a time like this, will they still avail of your services? Will they be able to pay for the goods and services you have to offer? Will they see your service as a necessity? Do the same assessment with your trading partners and suppliers. Are they capable of holding up a business? Most importantly, does your business have the resources to operate? Upon conducting the assessment, try to see where problems arise in your business processes, and create solutions accordingly. Being proactive and innovative can go a long way.
Make sure you have financing alternatives.
As said, virtually all businesses are affected by COVID-19. Thus, it is important for you to assume that your financing options may also be unavailable at the moment. Keep in touch and try to assess their current situations. Actively engage with them and try to ensure that available lines of credit are available for your use. Based on your assessment, try to see whether or not your business will be affected. If your financial option is hinting instability, it is best to be ready by seeking out new or additional alternatives.
This is your chance to get in touch with your bank or other sources of finance to make sure that credit availability will remain. Make sure you make use of your business connections to inquire into other available alternatives if needed. Getting your cash flow from your receivables is also an option that you should consider.
Properly manage your inventory.
Inevitably, with many business processes coming to a halt due to the global crisis, there will be different kinds of shortages in raw materials and a surplus of non-essential goods. If you wish to keep your cash flows at a positive, it is important to properly manage your inventory, ensuring that you have suppliers that can back your business operations. If your regular business partners are unable to perform during the crisis, immediately look for alternative providers of raw materials and component parts. Explore the alternative supply chains that you can make use of. Being proactive enough to find ways for your company to continually operate amid the pandemic will surely bring advantages for your company.
Manage your debtors.
Now more than ever, your company is experiencing a huge economic challenge that will definitely burn your resources. To an extent, the goal of businesses during COVID-19 might not be to have huge monetary gains. For a lot of small to medium enterprises, having enough in order to continue operating is enough. Given that your company is basically in do or die, it is time to become more assertive on your customers who have not yet settled their debts to the company. There are many measures you can implement as a way to entice your debtors to settle their payments. At a time like this, any money is good than nothing at all.
To compel your customers to pay their dues, it would be good to incentivize payment through reasonable discounts. Or, you can also have an arrangement with your client and settle for periodic payments. Make sure that these arrangements are properly enforced so that you won’t have to worry about chasing clients and asking for their payments.
Before you can start doing this, it is important to implement the following changes to your bookkeeping and administrative processes:
- Provide an invoice as soon as your product or service has already been accomplished.
- Constantly review the debtors of your company. Be sure to provide slow payers with the necessary push they need.
- Review the agreements you have with clients. Depending on what is provided in their contracts, be strict on when a customer is permitted to cancel orders. To some extent, you can also update contracts to avoid cancellations.
Check and adjust the cash flow budget.
Amidst a crisis, foresight is the key to understanding the impact of a slowdown to a business cash flow. To pinpoint the possible effects of revenue reduction on your capacity to pay suppliers and debtors, there should be a constant review and adjustments on your cash flow forecasts. Although a lot of businesses typically place cash flow monitoring at the back end of their company services, this should no longer be the case at the time of this crisis.
Have your team of accountants closely monitor and project possible changes in your cash flow. Looking for online accounting software to do the work might be of huge help as well.
Review your business’ capital outlay.
The uncertainty brought by COVID-19 should be an enough factor for business owners to cautiously weigh any capital equipment investment until there’s an improvement in the situation. Some establishments see this uncertainty as a rare chance to invest in new equipment in order to bounce back and make an advantage. Although the COVID-19 crisis may have severely affected a lot of small to medium-sized businesses, your company’s ability to adapt through smart decisions and investments can help you regain losses incurred during the pandemic.
Having the right business ideas can be the difference between bankruptcy and business success. As a competitive business, it is important for you to properly assess or project possible opportunities for your company. All decisions should be grounded on the current state of your enterprise and the trajectory you are aiming at.
Report your finances on time.
To properly monitor your profitability, stock levels, overheads, and debt and credit balances, make sure to constantly update your financials. Dig into online accounting software that might be of use in this process. Choose software that has helpful options, such as customizable invoice templates and automated invoice reminders.
Do some overhead cutting.
The profit and loss statement should be checked by business owners to find possible sources of savings by cutting overheads like consumables and advertising. Consider the reduction of staff wages to avoid layoffs if labor is a significant source of costs in your enterprise.
One way to do this is to reduce contract labor and redistributing the work to the permanent staff. The reduction of office hours is also an option you can offer. Another is to encourage your staff to maximize their available leave or leave without pay. Careful in considering pay cuts and make sure to review the available employer subsidies before deciding. If you can maintain your workforce, it will prove beneficial once normalcy will resume.
Take advantage of government support.
Governments are very much aware of the different struggles businesses are currently experiencing. As such, your local and national government probably has a plan set out to help businesses cope with the losses. Keep in touch with the different online platforms of your government agencies. If they offer any form of support, be sure to apply for their program. Any tax breaks or government subsidies will do much to help your company cope and maintain positive cash flow.
Consider other ways to boost your revenue.
One of the most obvious ways to maintain positive cash flow is by boosting your revenue. Although it sounds simple enough under normal circumstances, it can be the hardest thing to do during a pandemic. This is the biggest test of your capacity to innovate and make your business relevant amid the growing threat of COVID-19. How will you make your customers take an interest in your product amid the global crisis?
Generating revenue during COVID-19 requires you to have an understanding of consumer behavior and spending. You must understand that at a time like this, customers are not interested in shopping for luxury. With everyone on “survival mode,” the utmost concern of your client is to reserve their funds to purchase goods that are extremely necessary. These are the following ways to shift your customers’ interest to your products:
- There is no clear line on what essential and non-essential goods really are. In fact, most of the time, it will depend on how you manage your brand and make consumers realize that it is something they must have. Try to assess the strengths of your products and see why it is a must-have for your consumers. Use this branding as a way to convince more customers to purchase your products, thus leading to higher revenue.
- Sometimes, the reason why clients are not purchasing your products is not that they don’t think of it as a non-essential but because they don’t have access to it. Some clients have enough money to spend and would be willing to purchase your products if they had the chance. You must take advantage of this situation. Make your products more accessible by subscribing to convenient delivery systems to help your client gain more access to your products. Maybe, just because the option is available, they will be convinced to purchase your product.
How Can Proweaver Help?
As a web design and digital marketing company, we can help you stay connected with your clients through the online platform. In the past few months, the digital world has truly proven itself to be the future. Physical stores were forced by governments to shut down due to the need for quarantine and social distancing. However, by providing a space where people can interact despite physical distancing, the cyberspace has allowed businesses to function.
Here at Proweaver, we are experts in bringing connectedness in the digital world. Through our websites, your business can establish its online identity. With an online platform, you can better reach your clients who need of your services.
Through our digital marketing strategy and expertise, we can help you reshape your brand. By bringing an adaptive social media marketing strategy, we can help you gain better online visibility. With more clients having to know more about your services, you can have the chance to improve your cash flow.
What are you waiting for? Avail of our services, and get your business back on track today!