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Managing through economic cycles is a regular part of owning and managing a business, but an unprecedented event such as the COVID - 19 and its ensuing impact can devastate even the most prepared of businesses.

COVID - 19 poses unique and enormous challenges for businesses that have the potential of pushing these businesses over the edge. Some of the difficulties being experienced include:

Dramatic reduction in revenue

  • Supply chain threats
  • Organisational disruptions
  • Staff management
  • Health issues for owners and staff
  • Legal issues

 

Not surprisingly, businesses are struggling with the unexpected nature and the scale of the social financial and economic impact of COVID – 19.

So, how do you survive this crisis from an economic point of view? How do you preserve your cash flow so that you survive this difficult time?

After all, you need to be able to survive long enough to have the capacity to bounce back when things start to improve.

In the midst of a crisis, one of the first things to look at is your expenditure. You need to carefully assess your expenditure and understand where your money goes.

For example, look at the following:

Consider your planned expenditure for maintaining business operations. Now think about, what can be reduced or what can be eliminated altogether.  

Think about your significant expenses such as rent and wages how can you reduce these expenses in the short and medium terms.

In order to survive this difficult period, we really need to look at all options for reducing expenditure, so I am going to give you a few practical tips on what you can do in order to reduce your expenses.

So, what are the options as far as reducing your expenditure is concerned; well there are no hard and fast rules. What you need to do is get together with your team, your advisors or simply the kitchen cabinet, who have a good understanding and knowledge of your business and brainstorm ideas. In a situation such as this one, there are no good or bad ideas and everything should be put on the table. Here are a few thoughts to get you started:

  1. Review your expenses - you need to conduct a review of all of your expenses and identify those that can be scaled back immediately.
  2. Remove or reduce discretionary expenditure - anything that is non-essential should be stopped immediately.
  3. Look at your staffing arrangements - review arrangements with your staff, look at your casual staff and see what can be done in order to reduce your salary expenditure.
  4. Shop Around - these are difficult times and you need to actively price shop for all products and services that your business utilises. See if you can find a more cost-effective solution.
  5. Finance Costs - talk to your bank about the interest rate they are charging you and see whether there is a different package or any options in terms of reducing the fees and charges associated with the borrowings that you have. Sometimes consolidation of certain facilities can help to reduce fees and charges. Don’t wait for the bank to suggest such things, take the initiative yourself.
  6.  Speak with your landlord talk to them about a rent holiday or a reduction in rent. As you are aware the government has mandated it for the landlords to negotiate in good faith with the tenants and come to a compromise. It’s impossible to pay rent if your business has been forced to shut its doors due to the current restrictions. The good outcome would be a rent holiday or a significant reduction with a possible extension to the lease.
  7. Credit sales to your customers - if you have been giving credit to your customers it's very important to establish control over these accounts and ensure that they do not become overdue or bad debts. What you need to do urgently is to review your credit policies going forward. You need to decide if you are still going to offer credit or if you are going to change your policies. For example, it may be better to encourage customers to pay using credit card than offering them free credit.  
  8. Consider options for outsourcing non-core or support activities - if you are running a particular type of business and there are certain activities which are considered as non-core, there may be an opportunity to outsource these. For instance, for a business that requires bookkeeping services, it may be more cost-effective for you to outsource that work to a bookkeeping service or agency rather than employing your own staff to do the same work. This way you have the flexibility of increasing the amount of work that you get done or reducing it or cancelling it altogether without any major consequences. Outsourcing can be a really effective strategy in certain situations and you need to explore whether it is suitable for your business or not.

 

The relationship between cash and expenses

In such difficult times, it helps to peel off the layers of complexity and to get back to the basics.

In recent times accountants have created a lot of confusion amongst business owners with concepts such as accrual - based accounting; whereby when you incur an expense, it’s a recorded in the accounts immediately as an expense and also as a liability. When the payment is eventually made the liability is extinguished but the expense had made it into your profit and loss statement a lot sooner. This means the cash flow of the business and the profit/loss recorded in the accounts are two different things altogether.

The same concepts applies to sales as well but in reverse. So, simply put, you can be profitable without having cash in the bank.

At times like this the famous saying “cash is king” really rings true. So, if cash indeed is the king what is it that we need to do to look after this very valuable asset of our business.

Cash is vital for business continuity, after all you cannot pay bills with accounts receivable, inventory or goodwill! Cash flow forecasting is the estimation of cash receipts and cash payments of the business over a given period of time. As I wrote in my first book, The A to Z of Healthy Small Business, “Cash in must be more than cash out or you will be on your way out”.

Cash flow planning is important as it allows the business to prepare for periods of low or negative cash flow. Obviously, the next few months are going to be difficult for many businesses that have seen a significant decline in their sales or in some cases have had no sales at all.

Getting control over your cash position is absolutely critical in the current business environment. We as accountants like to think, it is important all of the time, but I suppose, it's really hitting home for most businesses right now.

You need to start by estimating how much cash you have coming in versus what you will have going out over the next few months. Once you have a simple, cash in on cash out forecast, you need to assess where you stand.  It is very likely that like many other businesses at the moment there is going to be a gap between cash in and cash out. The next step is to quantify that and figure out the exact amount of gap that we are looking at. Now, we have something to work with.

Once you know the extent of the shortfall, it is time to get busy finding solutions. One of the first places to look at in terms of additional funding is to find out about the various initiatives announced by the governments, federal and state.

Think about your personal sources as well and see if you have funds that can be invested in the business.  Are there any assets that can be liquidated?

Remember also that the Reserve Bank and the governments have been making it easier for banks to lend money to businesses, so don’t hesitate to approach your bank. Speaking of the banks, you should also discuss your existing facilities and work out a plan for repayments that suits the current situation of your business. The Banks are under strict instructions to help all businesses that have a genuine need at this time. Finding a helpful and cooperative bank manager may be rare under normal circumstances but as everyone keeps reminding us, these are unprecedented times and hence you may actually find such a person.

When you're doing your cash flow forecasting it is important to look at the what if scenarios too. What happens if your expenses end up being higher than what you were expecting or if your revenue is lower than what you estimated? What if there was some unexpected emergency and you had to buy a piece of equipment? These are just some of the things that need to be taken into account and considered as part of your cash flow planning.

This type of cash flow planning is absolutely crucial and critical for the survival of your business. Invest the time now and hopefully you will be around to tell the tales of your survival for many more years to come.

 

Amer Qureshi

International Author

Director – Consulting

Vincents

E: AQureshi@Vincents.com.au

T: 61 2 6274 3400