Cash flow management strategies for the second wave of COVID-19

Financial survival has been top of mind for many companies since the first lockdowns were declared in March of 2020. Almost 40% of Canadian entrepreneurs are now prioritizing restoring their financial health, according to a new BDC study.

The recent rise in coronavirus cases has created uncertainty once again, fuelling fears that things could get much worse. Business is not as usual.

In this situation, how should you manage your finances to ensure the continuity of your business? Where do we go from here?

5 lessons learned during the first wave

The good news is that you are not starting from scratch. You can and should look at the lessons learned during the first wave to help you take the right decisions this time around.

1. Agility is key

Those who were agile could pivot their operations and optimize their sales reducing the impact of the economic slow down.

2. Focus on health and safety

Reducing consumer and employee fears is paramount—safeguards and disinfection protocols need to be in place; communications and constant vigilance is essential for restoring employee and consumer confidence.

3. Lower expenses

Lowering expenditures to reflect reduced activity can help businesses break even and keep their doors open.

4. Keep a tight rein on cash flow

The maintenance and conservation of cash through active collection and management of receivables and daily scrutiny over payables is essential to keep your business going.

5. Prepare frequent financial forecasts

Frequent, forward-looking financial and cash flow management is now a core focus area so that owners and managers can lead their companies through disruption.

The first step for any company that’s worried about its finances should be to ensure these lessons learned from the first wave are implemented within the business.

Second wave: Plan for different scenarios

Each of you face different circumstances. Some of you can still maintain an optimistic outlook because you provide essential services. But what if there is a sudden drop in demand? What happens if you go into another severe lockdown? Or if the economy suddenly revs back up to speed?

Scenario planning is one way to prepare for the worst, while being ready with working capital, for when business picks up.

We ask our clients to consider three different scenarios:

• Survival and mitigation
• Normal but reduced activity
• Business as usual with potential for growth

These scenarios have been broadly defined and really guide your behaviours in respect to stimulating sales, maintaining budgets and anticipating cash flow. Each require different cash flow strategies and are intended to help you plan and identify problem areas before they occur.

Scenario 1: Survival and mitigation

In this scenario, your business might not be earning enough to break even. Risk mitigation is key, especially if you expect your business to remain dormant or at such a low level of activity that you risk closure. If you find yourself in this situation, consider these three strategies:

1. Reduce business activity for services that are unlikely to break even during the next six months

Calculate the minimum sales you need to survive a second lockdown. If you don’t think you can reach that goal, then look for ways to pivot or evolve.

Focus on essential costs only and cut non-essential ones. Add up all your fixed cash expenses such are rent, salaries, communications, interest and principal payments on loans. Then, divide this by the margin you earn on each sale (usually a percentage).

If you think your business might not earn break even levels, you may have to consider cutting your expenses to the strict bare minimum and lying dormant until things return to normal.

2. Evaluate your investments and financing options

Can you sell fixed assets or inventory to help make ends meet? Is it possible to sell equipment or vehicles to recover some cash to help with operations? Have you renegotiated your loans? Could you approach potential investors for a short-term cash infusion?

3. Renegotiate fixed costs

Reflect on whether your fixed expenses can be converted into variable expenses. For example, is it possible to approach your landlord and modify your rent to a revenue based rental (e.g. percentage of sales). Under this agreement, your rent will increase as your sales increase, but the cash flow will also reflect the business activity and be easier to manage. Could this approach apply to other fixed expenses, including salaries for instance?

Scenario 2: Normal but reduced activity

Companies in this scenario are operating anywhere from 50% to 70% of their “normal” capacity. Apart from a rigorous tracking of your cash flow, you might want to consider lowering expenses. We suggest these four strategies in particular:

1. Maximize your profit margins

Look at your recent sales and income streams:

• Where are you earning the most money and can you grow those revenue sources?
• Would it be possible to slightly increase prices on some of your top selling items?

Stay vigilant in managing your costs by each line of business and by each expenditure line item. Defer or reduce non-essential costs and identify opportunities to transform fixed costs to variable costs. For example, can you work from home or move to a co-working space to transform fixed rental costs into variable costs. This will provide you with additional flexibility.

2. Watch out for credit risk

Now is not a good time to take on risky clients; make sure you have a good process to ensure that new clients are able to pay you, You may also want to monitor your slower-paying clients more closely to avoid bad debts.

3. Ensure your supply channels are not compromised

The initial lockdown caused supply chain constraints and delays. Manage your vendor relationships, understand commitments and ensure you do not face delays.

4. Maintain your credit standing

Your lender knows these are difficult times. Cultivate an open and transparent relationship by being open about the challenges you are facing and how you are tackling them. Continue to stay close to them and make sure you meet your debt obligations. Your credit standing will help you once you start to recover.

Scenario 3: Business as usual with growth potential

If you find yourself in this fortunate position, continue to build up your cash and stay vigilant about your spending. You are still not ready to start spending on discretionary items.

You can also start thinking about making investments you may not have been able to make previously. Interest rates are lower than they’ve even been. Productivity and technology are playing a bigger role than ever. It’s important to keep those in mind as you plan your investments in equipment, real estate or other items that will increase your productivity.

It’s also a good time to look at potential acquisition targets. Industries are being reconfigured and we expect a lot of consolidation. Keep an eye out for opportunities to gain new markets or add to your capacity.

Multiple plans may be needed for a single company

If you have more than one business line, you may find that each line is faced with different challenges.

For example, consider an Italian eatery offering inside dining, take-out and retail services.

Consumer behaviour has adjusted to the pandemic with take-out and “imaginative packing of retail products” becoming primary sources of revenues over the near term. Containing the cost of service for inside dining may be needed—in fact this part of the business may need to be shut down temporarily to avoid losses.

Each business line may face different growth and revenue outlooks; the cash flow outlook for each will also be different.

We propose that a cash flow plan be developed for each area to identify where there may be shortfalls and to ensure that cost containment and resource allocation is executed with targeted precision. This will allow the eatery to prioritize its activities while also maintaining some semblance of profitability.

Don’t hesitate to ask for expert advice

We have assisted and guided tens of thousands of companies through the first stage of this pandemic. Many sought financing to ensure they had enough reserves to buffer reduced operations. Others took drastic measures to reduce costs and right size their organizations. Almost all of them initiated some form of cash planning to understand the risks to which they were exposed.

Our basic cash flow management tools were downloaded thousands of times to enable our entrepreneurs prepare and plan. Becoming more financially literate is now a priority.

Many of our clients now anticipate a very slow and gradual recovery, with those in the entertainment and tourism industries seeing dormancy until as far out as Spring 2021.

As I highlighted above, we suggest creating a cash flow plan under a variety of scenarios to provide you with clarity and direction to make sound decision going forward.

Many of you have learned how to maintain a rolling cash flow forecast, but now you must forecast cash flow through uncertainty and this can be quite challenging. Don’t hesitate to reach out to us if you think you may need help. The good news is that you have all learned so much. Once the pandemic has been controlled, your businesses should be much stronger and able to take advantage of opportunities that present themselves.