Cashflow considerations: how to keep your business moving forward during a deep recession

by | Oct 29, 2020

There’s no way to sugar-coat this: it’s going to be a tough six months for businesses.

Economic experts have underlined the need for financial flexibility, citing this as key to the fightback for business solvency in uncertain trading conditions. This means smart management of working capital and keeping a close watch on cash flow.

Effectively managing the business’s working capital, i.e. the amount of money tied up in the day-to-day costs of running a business increases the likelihood you will have the headroom to take advantage of upcoming growth opportunities.

Keeping cash in the business is undeniably challenging and stressful in these conditions but undertaking robust planning and follow-through can help you to see that silver lining.

Firstly, businesses can use the Pay As You Grow scheme as they start repayment on Bounce Back Loans to HMRC next year, as this allows lower, more flexible repayments, interest-only periods of up to six months and payment holidays.

The government has also expressed its intention to give Coronavirus Business Interruption Loan Scheme lenders the ability to extend the length of loans from a maximum of six years to ten years. Time to Pay arrangement may be used if HMRC is satisfied that you’ll stick to the arrangement and repay all your taxes in full, but it has recently reverted to its ‘pre-lockdown’ position of expecting financial information to support a TTPA request – which is likely to include a cash flow forecast, documentation of management accounts and cash reserves and an explanation of the commercial rationale.

And if your business is one of the nearly half-million which deferred their VAT bills, you will now have the option to pay back in smaller instalments, making 11 smaller interest-free payments during the 2021-22 financial year.

In addition to government-backed support schemes, cashflow management done effectively can also create a stronger financial safety net and enable future business growth. Here are a few more strategies I recommend…

Keep a close watch

Things are changing rapidly. If historically cashflow reporting and management was handled monthly, forecasts being prepared weekly or biweekly can help to keep cash front of mind and alert you to cash flow issues before they become full-blown problems.

It can also help to illuminate ways in which your business can pare back on expenses and reduce variable costs such as contract labour.

With late payments being quite common during the pandemic, many businesses are exploring ways to ‘future proof’ against bad debt.

The most important thing is to first be punctual and procedural about invoicing and collecting payment. Pinpoint any recurring issues such as invoices not being sent on time, regular disputes or credit being offered to businesses who can’t afford to pay. These issues must be addressed immediately, and you’re likely to need to dedicate resource and have accountability within the team as you go forward.

Model possible scenarios

In times of crisis like these, your essential customers may face difficulty paying, or deliberately decide to delay payment (sacrificing supplier relationships in the process). It’s important to consider how you will handle this, and to consider the other ‘what ifs’ which may occur.

While being optimistic is an essential quality in running a business, relying on blind faith and optimism when it comes to cash flow can be disastrous. Modelling is an exercise which allows you to anticipate stumbling blocks and proactively problem-solve – modelling a variety of scenarios will improve your understanding of the impact of drivers on cash flow, in turn leading to better decisions.

You should consider modelling sales scenarios and cash collections, exploring what it will take to pivot or invest in new innovations, or how cash-raising may stand to impact the business’s performance in the longer term, and these can be done with various forecast horizon, reporting date granularity, cashflow classifications, and frequency of creation, depending on the type of modelling being done.

Take a big picture view

Although the global economic contractions resulting from the pandemic have outstripped the 2008 recession, and the rate of fall has been much faster, we can examine this event and the marketplace in the recovery period that ensued. You can also look at the most recent global event to significantly impact global supply chains, the Tohoku earthquake in 2011, for further insight.

Success stories from these downturns may give you a steer as to what opportunities there may be, and where to access them. I believe that no matter what the conditions, there are always people looking to invest in dynamic and growing businesses. In markets like these, they are most often looking for a bargain – and businesses of any size may benefit from intrepid investors with a big picture view.

Keeping cash flowing in the business can mean connecting with other organisations at a local level. For start-up businesses, I highly recommend local networking opportunities such as joining business clubs, which have a genuine intent of trying to help each other out through challenging times – now more than ever.

Think like a CFO

While the company’s CEO and his or her proxies busy themselves with day to day operations, they may not be paying much attention to finance and treasury issues.

However, looking at the trends in your business’s financial data and taking a proactive approach to cash flow is crucial to running a resilient business.

You should endeavour to be responsive to how each of the rapid changes of 2020 reflects in your cash flow – have the recent travel bans and restrictions on meeting in person impacting spend? Is the acquisition of tech precipitating the need for a leap forward in training? What developments are likely to impact your business at the end of this year and the first quarter of 2021?

Thinking like a CFO means understanding how your financial data informs your growth, and connecting the dots as to how your operations, your finance, your team and your technology all connect to create the foundations of your business. The need to take a timely approach, which ensures key players are constantly informed of cash flow management strategies, targets and whether these targets are met, can’t be understated.

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