The key to managing cash flow during the COVID-19 pandemic

The current climate is challenging for businesses, with various measures meaning that your volume of work may have reduced, or you may have had to change your working practices.

With additional measures being put into place recently, rebuilding and recovering is essential, now more than ever, to ensure the future of your business.

One key aspect will be managing cash flow, at a time when income may have reduced, it is essential to manage your cash flow effectively to plan adequately for the coming months.

Many businesses are bringing back furloughed employees, or considering using the Government’s new Job Support Scheme, and these costs will need to be factored into your cash flow. Particularly if you are awaiting any payments, or if your outgoings are exceeding your income.

Poor cash flow is one of the most common aggravating factors in business insolvency. With the most recent statistics suggesting that the late payment of invoices is the cause of one in five insolvencies, getting cash flow right could be the fine line between success and failure.

Unfortunately, getting cash flow right is easier said than done.

What exactly does cash flow mean?

Cash flow is the incoming and outgoing stream of money. If you have more money coming in than money going out, the result will be a surplus of cash. If you have less money coming in and more money going out this is, of course, a problem.

A lack of cash flow can cause serious issues, from not being able to keep the lights on to not having enough cash to pay employees. Negative cash flow can also cause a chain reaction of debt down the supply chain, which is why the problem often starts at the very top of the pyramid, for example, global companies with ineffective payment terms.

While big companies are the single major cause of cash flow problems among the small business community, what they do is entirely out of our control. That is why we need to think smartly about our own business decisions.

We believe that good cash flow requires three elements: planning, predictions and due diligence.

We can plan, for example, expenditure months, and even years ahead. Rent, energy, payroll, debt repayments and the cost of doing trade are all typical outgoings we can feed into the cash flow equation. Therefore, we have listed some – but certainly not all – business outgoings below:

Daily expenses (raw materials etc.)
Property costs
Energy and utility bills
Payroll
Loan repayments
Professional fees
Insurance
Travel expenses
Taxes
Vehicles
Marketing and advertising costs
One-off expenses (e.g. the office Christmas party)
Emergencies and repairs
Planned investment and upgrades

We can also plan – and conduct due diligence – who we do business with. For example, winning a large contract with a big company known for its financial lateness may not be a smart use of your resources. You may be better off securing several smaller contracts with reliable businesses, spreading the risk, building relationships and most importantly, assuring a good flow of cash.

Projections and planning for the unexpected are all the different moving parts an advisor can help you with, as you will want them to be as accurate and comprehensive as possible to create a precise cash flow model.

As cash flow is the balance of income and outgoings, the next step is working out your income.

Again, work with an advisor to calculate your income, as they will be able to generate extremely accurate income projections based on your historical financial data, as well as future predictions in finances.

The next part is simple: subtract, month by month, outgoings from income. You can now use this information to make better-informed decisions on whether you should cut back on expenditure, invest surplus money elsewhere, or take extra cash out of your business.

For help and advice, contact our expert team at Glazers today.