The coronavirus pandemic essentially served as a real-world stress test for organizations, and it remains an unpredictable force in our society. Leaders and executives are making significant decisions without reliable information amidst a constantly shifting economic and regulatory landscape. Whether your company adjusted to a painful new reality, pivoted to new products and services or experienced a surge in demand, all organizations should evaluate their ongoing response and pinpoint what worked, what didn’t and what could be improved.
Cash flow is the lifeblood of a business, and it is more important than ever to monitor. The steps below can help position your business for both short-term cash preservation and long-term growth.
Take a hard look at your existing business model
Owners and executives generally look for opportunities to cut costs, but now is the time to get serious about your business model as it relates to cash generation. The most obvious way to preserve cash is expense cutting measures, such as:
- Staffing levels: Review your workforce needs as this may be an opportune time to merge positions, develop remote working protocols and set up new human resources policies.
- Turn fixed costs into variable costs: Consider outsourcing corporate functions like bookkeeping or human resources. Explore whether existing technology infrastructure can shift into a variable expense.
While a thorough understanding of expenses and cost cutting measures may help sustain your current operations, do not compromise prudent risk management for short-term cost savings.
Understand your cash conversion cycle
The cash conversion cycle measures your company’s effectiveness at converting its investments into cash. The fewer days in the cycle, the more effective the organization is at generating cash from the sale of its product or service.
- Explore ways to collect payment faster: It is time to accept that customers are likely to pay more slowly than before as they also contend with the impact of COVID-19. Look for opportunities to shorten the cash conversion cycle. Will customers pay faster if you offer discounts or increase ease of payment?
- Identify opportunities for short-term cash preservation: During good times, with robust and reliable revenue, short-term cash preservation does not always create long-term cash savings. However, in uncertain times with questionable income sources, short-term cash preservation may become a solid long-term strategy. Hold tight. Hunker down. Wait it out. Even global pandemics end. Ask yourself which bills must be paid and which bills can be eliminated.
Revisit capital investment plans
Dynamic markets make it necessary to assess each investment plan and prioritize capital expenditures and projects. Consider whether these investments are prudent now, and if not, when? Deferring capital expenditures may be a solution to free up extra cash in the short-term.
On the other hand, now may be the time to invest in software or infrastructure that will increase business efficiency. Capital investment decisions, particularly in volatile operating environments, are unique to each organization. These types of decisions should be explored and communicated with stakeholders.
Communicate early and often
Maintain regular contact with lenders, suppliers and customers, who are likely also experiencing significant operating uncertainties. That’s why it is more important than ever to listen, get feedback and maintain strong relationships. Be especially open and transparent with lenders, who do not appreciate surprises.
Don’t forget to forecast
While the steps outlined above can help right-size operations to promote efficient cash flow generation, it is critical to conduct ongoing 13-week cash flow forecasting. Thirteen weeks represents one quarter of operations, which is short enough to be accurate but long enough to carry strategic value to your business. If you don’t have a forecast, now is the time to put one in place. If you do have a forecast, make sure it is updated regularly to include all organizational decisions, such as the strategies mentioned in this post.
Need help assessing your organization’s cash flow or implementing the steps outlined above? RKL offers a range of forecasting and projection tools to help business owners manage cash flow and navigate economic uncertainty. Contact your RKL advisor or use the form below to get started. Stay tuned to our blog for upcoming installments of our Response and Recovery in Focus series and visit our Business Recovery Resource Center for more insights and guidance.
