Your step by step guide to avoid the ‘Cash Flow Crunch’

The only certainty that’s emerging throughout this crisis, is that we all need to learn to live with uncertainty. However, uncertainty doesn’t have to mean being unprepared. It means we need to consider several potential scenarios and be prepared to cope, as well as possible, with each. Perhaps the best place to start is with the ‘worst case scenario’ so that you can build from there and cope with the worst, best and most likely scenarios.

Here are some tips to help you cope with these scenarios:  

If you’re not going to be eligible for government support beyond a certain date, or if it will reduce, how will you manage cash flow going forward?

(a) Work out your likely sales and the impact on profit and cash flow.

• Which of your customers are likely to be impacted and by how much?  Set up a spreadsheet and note the previous sales to them and set a percentage (based on knowledge of their situation) by which you estimate their purchases will go up or down.

• Are any products impacted by disruption in the supply chain? How much will that impact sales of those products? Factor that into the sales estimate.

• Are any services impacted by disruption or restrictions? By how much and when and how much will that impact your sales estimate?

(b) Which sales are most/least profitable? This is one of the ‘key levers’ impacting overall profitability.

• Work out which sales are most profitable and why and focus more attention on them. Allocate more of the marketing spend on them. Try to sell more of them to existing customers.

• Work out which sales are least profitable and find ways to make them more profitable. Negotiate with suppliers for better pricing on goods and find ways to reduce labour costs associated with them. If it’s not possible to make them more profitable, consider ditching them altogether to eliminate the drain on other more profitable sales.

• To report on profitability by categories of products/services you need to separate out the income and costs for each one, rather than lumping it all into one account. It may seem like a tedious process, however the results can be a real ‘eye opener’ and the improvement in profit well worth the effort.

(c) Work out likely costs and overheads in line with sales:

• Your suppliers are probably just like you and want to do whatever they can to retain good customers that can survive the crisis.

• Ask them for better pricing on goods and services. Go armed to the discussion with information on prior purchasing patterns, to justify the price you want
to pay.

• Ask them for better credit terms. This can save you heaps in interest payments
on loans.

• Reorganise your buying practices to purchase at the beginning of the month, creating an extra 30 days credit, if you get 30 day terms from the end of month.

• Analyse every cost and overhead and ask yourself if we can spend less, do it more effectively or stop spending on this altogether?  Every dollar you save goes straight onto the bottom line!

(d) What can you turn into cash to help?

• Assets no longer required due to reduction in demand.

• Slow paying customers - follow up with each one quickly when payments are due and be quick to make arrangements with those struggling to pay.

• Stock that is slow moving or obsolete.  Better to turn it into cash at a loss to spend on something potentially more profitable than let it sit and rot.

• Unfinished jobs/projects - the sooner you get them finished the sooner they can be invoiced and paid for.

(e) Cash Flow Forecasting:

• Plot it all out in black and white.  This will reduce your anxiety greatly! Rather than being in the dark, not knowing the situation, it is better to be able to see what the situation looks like, so that you can work at improving it.

• Once you’ve worked it out, don’t accept it as the ‘status quo,’ but use it as a starting point and find ways of improvement.

o Improve sales and profitability

o Reduce costs and overheads and improve efficiency.

o Speed up customer payments

o Slow down supplier payments

o Turn stock into cash quicker

o Turn jobs/projects not invoiced yet into cash quicker

o Make arrangements to pay off tax debts

o Find ways to reduce borrowing costs - shop around for better deals or reduce reliance on borrowing using methods discussed in this article.

(f) Budgeting - based on the first three points above, set out your budget based on best, worst and most likely scenario.  

• Keep your costs and overheads down to the minimum needed to achieve ‘breakeven’ based on worst case scenario sales. Breakeven means making neither a profit or a loss but a $0 result (better than a loss!) 

• Change costs and overheads in line with changes in sales, but try to minimise fixed overheads, i.e. those you can’t ramp up or down easily. For example, utilise freelance services and ‘hot desking,’ rather than employ permanent staff to reduce premises costs.

(g) Outside lending:

• Analyse the need for outside lending:

o Is it really necessary? Could you improve cash flow by other means outlined in this article?

o Are you likely to qualify for it? How good a proposition is your business to a lender? Just because banks and the government are helping doesn’t mean you won’t have to qualify for a loan. You will need to demonstrate:

* Accurate and up to date current financial information.

* Well prepared forecasts for profitability, asset and liability management and cash flow.

* Well thought out and documented business operational plans.

* You’ve got your ‘finger on the pulse’ of financial control in your business and the ability to be resilient in the face of disruption.

(h) What CFO On Call clients are doing to survive and thrive:

• Being creative and thinking laterally about how they can tweak what they do to meet demand in the marketplace.

• Retaining valuable resources (e.g. good staff) and utilising them effectively to ‘tidy up’ during downtime. Mcdonalds have a saying ‘If you’ve got time to lean, you’ve got time to clean!’ Great philosophy.

• Getting help to ensure they get maximum Government Stimulus available to them.

• Getting help to put information in black and white, such as Cash flow forecasts: What will be the position, given different scenarios and making changes quickly to minimise losses and conserve cash as much as possible?

• Getting online - setting up ecommerce and eradicating geographical barriers.

•          Looking after existing customers and creating goodwill for the future.

• Positioning to take advantage of gaps in the market when things ramp up again - beating competitors.

• Creating ‘leaner/meaner’ businesses for the future to be more profitable.

These businesses have the advantage of help from a calm and logical thinker (i.e. their CFO on Call ‘Financial Co-Pilot’). They are able to use us as a ‘sounding board’ for ideas on how to create agility in their business and use this opportunity to cope with the current crisi, and be a more efficient and profitable business in the future. 

If you’d like to bounce ideas off us , click here to arrange a FREE 30 minute Coaching Session with one of our CFOs.

https://cfooncall.com.au/contact/