“Turnover is vanity, profit is sanity but cash is king” and that is relevant now more than ever for businesses to carry on operating day-to-day in these uncertain times. It is vitally important that business owners are keeping an eye on their cash flow position, needs and requirements over the next few months.
Building out a cash flow forecast for the next 3-6 months (on a weekly basis) should be a priority and will act as a key tool for businesses in order to assist them with identifying potential cash ‘pinch points’. This enables them to take any necessary action more proactively to mitigate any risks or avoid cash flow shortages. This forecast should be a working model that gets updated as and when the business has new information that impacts the value/timing of cash flows.
It is also worth doing a ‘what if’ analysis on the forecast, i.e. what if a key customer makes payment to the business 7 days later than expected – how does this impact the cash flow position? Every business will have their own specific ‘what if’ scenarios that they may wish to make contingencies for.
Below I have listed some tips/considerations for managing/improving cash flow throughout the upcoming period:
Understand and make use of the government support available – these include:
- Coronavirus Job Retention Scheme
- Deferral of VAT payments
- Statutory Sick Pay Relief Package
- Small business grant funding of £10,000 for all businesses in receipt of small business rate relief or rural rate relief
- Coronavirus Business Interruption Loan Scheme – you will need to provide forecasts as part of your application for this scheme
- HMRC Time To Pay Scheme
See full details on the following link:
Suppliers – have timely, open and honest conversations with suppliers. It may be that part payments can be agreed in exchange for extended credit terms if cash is anticipated to be tight at a particular point. Alternatively, it could be that a key supplier needs immediate payment as they are having cash flow difficulties and you need to prioritise this payment (and speak to other suppliers about delays in payment). All small businesses are in the same boat and mutual understanding/co-operation will be needed over this period.
Customers – ensure work is invoiced at the earliest opportunity. Some businesses invoice once a month or intermittently. If work completed at the beginning of a month is not invoiced until the end of the month then potentially 2-3 weeks of time for this cash to be received has been lost. Also, as with suppliers, have timely, open, honest conversations with customers so that you know when you can expect receipt of invoices. If you have certainty over the timing of cash coming in this gives comfort! Before starting any work, you may also ask for an upfront deposit, particularly from any new customers where you have less of an established relationship/understanding.
Stock – the optimal level of stock to hold can be a difficult one to gauge. You want to have enough to ensure you can continue to meet customer demand but at the same time, having cash tied up in excess stock not needed to meet short-term demand is a waste of cash.
Reduce variable costs – these are going to be easier to cut in the short term than fixed costs. Every business should thoroughly review for any ‘non-essential’ expenditure that can perhaps be delayed or cut i.e. employee training expenses or bringing subcontracted work in house.
Maintain a close relationship with finance providers – if businesses have any loans or other forms of finance, they should contact their finance providers to ensure all available lines of credit remain available. Interest payments on loans that are set at x% above base rate will be reduced as the Bank of England has slashed the base rate from 0.75% to 0.1%.
Insurance – I suspect this is something many businesses have in hand, however, business interruption insurance policies should be checked to understand the cover that is in place. These polices will differ and some policies may not cover the impact of Coronavirus. However, if a claim can be made it is important that businesses understand what can be claimed, can quantify/substantiate their claim and they know when they may receive any payment.
Written by Dan Hines, ISSBA Treasurer