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How to Manage Cash Flow in a Crisis – Covid-19 & Beyond

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Several classes of business are particularly vulnerable to cash-flow issues stemming from the outbreak of Covid-19. Following this outbreak in early 2020, Canada’s businesses have suffered their greatest economic turbulence in living memory. The global pandemic has capsized revenue forecasts, toppled growth projections, and slackened cash flows to trickle. How we respond to this extraordinary and evolving situation will affect Canada and Canadian businesses for years to come.

The Covid-19 pandemic hit suddenly, causing upheaval to all parts of the economy– leaving business owners dealing with a lot of uncertainty.

Crucial Cash Flow Challenges

  • Cordoned off borders, government lockdowns, and diminishing demand for goods and services have all contributed to a sharp and unexpected drop in business revenues. For some businesses, the revenue collapse appeared in a week, while for others it’s been more gradual, but equally devastating.
  • The Covid- 19 pandemic stimulated the surge in online purchases, which has boosted some e-commerce companies. But for businesses that were not vigilant to adapt to the technological advancement in the business world, it is a severe setback. Regaining lost cash flow by expanding their technological capabilities can be a tough challenge. This is not something that a business can absorb and be an expert in overnight.
  • The supply chain disruptions may also have serious cash-flow implications for the businesses, even for a company whose consumer bank is still active. The impaired supply chain can make it nearly impossible for the business to produce enough to cater to the demand. Again, it adversely impacts the cash-flows.
  • Businesses dealing in the service sector are experiencing acute challenges due to social distancing. Physical distancing is impacting the basic trait of this sector– human-to-human contact. It can be very backbreaking for these businesses to survive as the demand dries up so does the revenues. 
  • While the pandemic has impacted all businesses, women-owned businesses have been hit especially hard. Sectors such as education, professional services, retail operations, food services, and health care are mainly concentrated by women.  As mentioned previously, these service sectors are particularly vulnerable.

Tips to Sustain, Manage and Grow Your Business Cash Flow

Everyone will inevitably suffer losses one way or another, in line with the economic turmoil. That is why it’s important to manage liquidity and cash flow now, taking uncertainties into account for future planning.

  • Understand your cash flow needs. Take a close and objective look at your cash flow situation. Understand thoroughly your current cash flow status and how long you can survive under these conditions. Undertake scenario planning to look for all the possible situations that can emerge (e.g.: sales continue to drop, or a key supplier shuts down) and design possible course of action for any worse situation. 
  • Conserve and stabilize cash resources. This can be done by developing key supplier and customer engagement strategies. Identify all the customers and vendors who represent critical accounts and inquire about if and how their needs have shifted. 

Manage and expedite receivables. Examine your accounts receivable and try to collect advance payments, or at least get a strong customer commitment about the payment date. Consider whether you need to adjust your sales channels. A shift to a digital world is creating new business dynamics going forward.

Synchronize with key suppliers to ensure you can comply with your critical deadlines. In these uncertain economic circumstances 3 C’s communication, collaboration, and coordination are essential to inform your supply needs and supplier’s commitment to meet them.

Manage payables carefully to preserve cash flow gaps. Negotiate intelligently for flexible, extended, and deferred payments.

  • Emphasize the cash-to-cash conversion cycle. Businesses primarily concentrate on profit and losses under normal business conditions. But, in abnormal business conditions prevailing now due to covid-19, intuitive businesses shift their focus from the income statement to the balance sheet. To meet working capital requirements during the crisis, it is essential to apply a coordinated approach that addresses all three elements of supply chain working capital– payables, receivables, and inventory. 
  • Reassess your variable costs. To immediately reduce your cash outflows, reducing your variable costs is often a quicker way than focusing on your fixed costs. For example, look for opportunities to reduce contract labor and re-distribute work to your permanent workforce.
  • Re-evaluate capital investment plans. During a cash flow crisis, you must consider what’s really necessary for the near term. What capital investments are crucial to position for the rebound? What capital investments should be reconsidered? What can be postponed until the situation gets better. In such a turbulent economic environment cash flow factor is critical in planning the capital investment.  
  • Concentrate on inventory management. Businesses are at risk of experiencing supply chain disruption due to shortages in raw materials. Inventory safety stock parameters potentially need to be updated to reflect the increased demand and supply volatility.
  • Stay connected. Networking is vital for surviving the pandemic crisis. It is essential to actively maintain the lines of communication open. Sustain a close relationship with your financial advisors and your financial institutions. Don’t overlook your business network in the turbulence of the moment. 
  • Finding current and future market opportunities. Being agile and creative can sprout opportunities you might have not noticed in pre-Covid-19 times. A quick pivot can put you back in business and help you remain relevant to your customers. Adjust your product and service to adapt to the new business environment. It can also help prepare you for the post-Covid-19 business environment.

Bottom Line

Cashflow management must be an integral element of a business’s overall Covid-19 risk assessment and action planning in the near term. The pandemic will gradually fade away as time passes but it is time to think about the post-Covid-19 business world. It is hard to predict exactly what the future will look like, but it will certainly offer new opportunities for nimble and creative businesses. 

This fast-developing pandemic has forced business owners to assess the state of their cash flow and make decisions to salvage whatever they can. Reacting promptly has become paramount, as every day brings new challenges. Let us help you actively evaluate your cash flow requirements, assess potential risks and develop appropriate actions under various scenarios. Feel free to reach out to Filing Taxes at 416-479-8532? Schedule an NTR engagement appointment with us and take the first step towards proper management of your finances.

Salman Rundhawa
Salman Rundhawa
Salman Rundhawa is the founder of Filing Taxes. Salman provides valuable tax planning, accounting, and income tax preparation services in Toronto, Mississauga, Oakville, and Hamilton.

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