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Business Advice

Cash Flow Planning for Businesses in the Midst of a Crisis

By April 22, 2020No Comments

It’s a scary time for business owners, and we’re right there with you. With COVID-19 forcing many of us to reinvent the way we do business, owners are scrambling to pay their bills, rent, and employees. 

This uncertainty is scary, especially for new businesses. It’s time to consider what’s in your control and what isn’t. You need to stop and revisit all of your financial projections right now before it’s too late. Scrap your previous budgets, and get into survival mode.

Creating a cash flow plan will ease your mind of uncertainty while preparing your business for what’s to come. The more prepared you are, the more likely it is your business will be able to make it through the financial crisis facing all of us.

Below we’ll outline the importance of cash flow crisis management and share our cash flow forecasting basics to help your business ride out the storm.

Cash Flow is King

Cash is king. If you don’t control it, your business will go bust. How liquid is your business right at this moment? Just because your business regularly turns a profit doesn’t mean you have cash ready and available on hand. 

Controlling cash flow is essential to business survival, and it becomes even more important during a crisis. An unpredictable crisis like COVID-19 is exactly why it’s imperative that your business has a healthy cash flow. Without cash, you can’t pay your employees, and you can’t pay your rent. Eventually, that could mean closing up shop for good.

Cash Flow Crisis Management

In a crisis, cash flow forecasting requires a new level of intensity. It has to be realistic, and no stone can be left unturned. Hopefully, things will get back to where they were—but plan for the worst and cut expenses where you can, while you can.

You need detailed amounts, specific dates, precise milestones, and clear triggers for when things don’t go as planned. Your cash flow forecast is a living document that must be looked at and adjusted consistently. You should be generating a new forecast every week that’s adjusted for varying revenue assumptions, expenses, cash collections, cash burn, and timelines.  

No one has the ability to predict exactly what will happen next, which is why it’s important to consider and develop a series of plans designed to deal with a wide range of outcomes. Having a variety of plans in place will accelerate your response time in the face of a crisis. 

Create a crisis forecast for the next 3 months, 6 months, and 9 months. What are the decisions you need to make to ensure the survival of your business? 

Fear is the Mindkiller

You’ve probably heard the saying, “Hope for the best, but expect the worst.” We would add that you should also expect the tough period to last longer than you think. 

Fear usually sets in when we’re unsure of where our business’s finances really stand. We’re scared to look, and we think looking will only confirm our fear of how bad things may be. The best way to conquer your fear of the unknown is to face it head-on and determine what’s in your control and what isn’t. 

Don’t let fear keep you from examining your financial information. The facts are your ally, and gathering every one of them is the only way to determine what your next course of action should be.

You May Have to Lay Off Employees

As payroll is your highest cost, you might need to lay off some employees. And we don’t say that lightly. Payroll is a painful expense to reduce in a crisis. As business owners, we know our team members and employees personally, and we hate the idea of hurting them financially with a layoff. 

The government is creating programs to support businesses in these turbulent times, but not all businesses will qualify for this relief, and not all will be able to avoid layoffs. As hard as the decision is to lay off your employees, it’s one that’s crucial to the future success and security of your business. Gather all the facts you can, and don’t leave these decisions to the last minute. 

You may want to hold onto all of your employees, but no one will have a job at the end of this if you can’t keep the business going.

Cash Flow Planning Basics 

Start With Money Coming In

Do you have outstanding receivables? What will it take to ensure they’re paid faster than usual? Do whatever it takes to get those funds into the bank. 

Request prepayments, advances, and deposits when possible for any new sales. Consider offering discounts for speedy payments. It might harm your profitability in the short term, but it will allow you to stay afloat—plus, it will provide some benefit to your customers.

Examine Your Expenses

Look at what needs to be paid, what you can delay, and what you could survive without. Question every expense—can it be postponed, reduced, or eliminated? 

This crisis presents you with a unique opportunity to take a hard look at any inefficiencies that have crept into the operations of your business. 

You can’t plan if you don’t have an understanding of your current state of affairs. In order to generate a clear and defined cash flow plan, it’s imperative that your bookkeeping is up to date. 

You should be able to report on these key metrics: 

  • Current cash balances
  • Receivables that can be collected quickly or are overdue
  • Projected cash flow from operations “as is”
  • Projected gross cash burn rate (your total expenses on a monthly basis)
  • Payroll expenses
  • Payments that can be extended or delayed—loans, tax payments (where applicable) 
  • Sources and amounts of financing available—bank loans, lines of credit, VC financing, government support, personal funds

Communicate With Those Impacted

Communication is an important aspect of crisis management. You need to honestly communicate with your team, suppliers, investors, and anyone else impacted during this uncertain time. 

Let them know how this crisis and any changes you make to your business will impact them specifically. A crisis is not a time for secrecy. The more transparent you are now, the better. Secrets and games will lose the trust of those around you at a time when you need them most.

Cash Flow Forecasting Resources

Excel Cash Flow Forecast

A basic cash flow forecast template can get you started. You can download our free Excel template, and there are also Google Sheets templates available online from various financial websites. That said, we do recommend you use a dedicated app.

Use a Dedicated Cash Flow Forecasting App

Cash flow forecasting software companies have extended their free trials to help businesses forecast during the COVID-19 crisis.

Float is offering an extended free trial of its cash flow forecasting software until May 31st, 2020 for new trialists and businesses struggling with Coronavirus-related cash flow issues. Dryrun is offering a 3 month free trial of their service, which helps businesses manage cash flow, revenue, and growth scenarios. Both apps integrate with Xero, Element CPA’s preferred accounting software.

Element CPA Can Answer Your Questions

Cash flow planning is not a one-time exercise for when crisis strikes. Your business needs to run regular cash flow forecasts to prepare for every possible outcome. 

We’re here to help you ride out this storm. Reach out to Element CPA for a free 30 minute cash flow call. We can provide your business with the financial support you need, wherever you need it most. 

Contact Element CPA to begin your free 30 minute cash flow session.

About Element CPA

Element CPA is an innovative accounting partner that’s 100% focused on helping Canadian startups and small businesses get their books in order, operate more efficiently and plan for the future. We handle the day-to-day financial operations that make your business run, tell the story behind your numbers and provide advice as you grow.