The Australian government has launched a vast and unprecedented support program to help businesses survive the effects of coronavirus. Yet many are still struggling, quite understandably, to manage cash flow in these difficult times.

Healthy flow of cash in and out of the business means you can pay employees and suppliers as well as rent, rates, taxes and other operating costs on time.

The challenge, even at the best of times, is to manage the money coming in (accounts receivable) with the money going out (accounts payable).

Ideally, you should be aiming for a consistent positive cash situation – in other words, more money coming in than is being paid out.

So how can you ensure that you’re managing your finances properly, especially in the current extremely difficult trading situation?

Create and manage a cash flow forecast

You need to be able to make decisions based on sound forecasting and estimates, so establishing a cash flow forecast is essential.

Start by making a list of assumptions on which to base your forecast. This should include a prediction of price increases for your raw materials and what you’ll therefore charge your customers.

There should be a projection of the growth or reduction of your sales, taking into account issues such as the seasons and current trading environment.

You’ll also have to factor in outgoings such as raw material increases and the growth of other costs.

Here are the key factors to consider in your cash flow forecast:

1. Revenue

Once you have a reasonable idea of how your sales will perform, you’ll need to think about how much revenue this will bring in. This may be challenging in the current climate and you may need to factor in a percentage of sales reduction to forecast more accurately.

Take into account when you’ll actually get paid for these sales.

You might, for instance, have a regular customer who gives you a lot of business, but right now has reduced their demand and asked that they delay payment from 60 to 90 days. You’ll need to factor this into your forecast to reflect your current situation.

2. Expenses

These typically include wages and salaries, suppliers’ costs, rent and rates, directors’ remuneration, and the purchase of new assets.

You might need to add interest payments and insurance premiums. Use last year’s bank statements as a checklist while anticipating any new incomings and outgoings for the next 12 months, based on internal and external factors.

Gaining a clear view of your finances

Creating a cash flow forecast will give you a reasonably accurate view of your opening and closing financial position for a month, six months and 12 months.

It’s often said that a cash flow forecast is never finished – for it to be effective, you should constantly review and update it. This is especially pertinent today when operating in uncertain and disruptive times.

Use what’s currently happening in the business to correct any assumptions you made when creating the forecast.

It’s also important to stress test your projections – especially during uncertain times.

If sales suddenly fall by a quarter, for instance, will you still be able to pay your essential bills? What will be the impact if you must repair or buy a new equipment?

Review finance options

If your business has been impacted by the coronavirus outbreak, you might be eligible for financial assistance from the government. The federal and state/territory governments have announced economic stimulus packages for businesses, which focus on cash flow support through special payments and tax relief. Additional measures are available for businesses that employ workers to save jobs.

Meanwhile, banks are making it clear they will play their part too. The Commonwealth Bank, Westpac, ANZ and NAB are offering help and advice for business customers, including loan repayment deferrals.

It’s important to speak to your bank and accountant, if you have one, as well as your industry body and others in your sector about accessing this support.

Invoice finance and asset-based lending

This form of financing is especially useful if customers are slow in paying their bills.

Essentially, invoice or accounts receivable financing enables you to use your unpaid invoices as security for a loan. You simply pay a percentage of the invoice amount to the lender as a fee for borrowing the money.

Invoice factoring

Then there is invoice factoring. Here, you sell your unpaid invoices rather than waiting for the client to pay, usually for around 80% to 95% of their total value.

Once the client has paid the factoring company the full amount, the factoring company then pays you. They’ll charge you a service fee, which is usually around 2% to 5% of the total invoice.

Business line of credit

Another option is a business line of credit, also known as revolving credit. Here, you borrow money either in one lump sum or as several smaller amounts until you reach the agreed limit of credit.

Each draw down becomes a separate loan to be repaid according to a repayment schedule. As with any loan, you pay interest. In this case, you repay each of the loans with interest.

Unlike an overdraft you don’t have to go into the red on your bank account to access a line of credit.

Importance of financial reporting

As coronavirus throws so many businesses into confusion, it’s easy to let financial reporting slip.

Financial reporting is essential to ensure you have all the information required to apply for loans and investments, but also so you can keep an eye on the financial health of your business.

Ensuring financial reporting is up to date means keeping an eye on your balance sheet and making sure your assets and liabilities are still accurate, detailed and itemised. You should be able to see that the two are balanced and that you’re not facing the prospect of insolvency.

Keep an eye, too, on your cash flow statement, as this shows your viability in the short term and helps you to manage your bills.

Check your cash inflow and cash outflow are accurate and up to date

Similarly, you should pay regular attention to your profit and loss (P&L) account so you can check you’ve made a decent profit over a set period. Ensure your sales and other income, on the one hand, and your costs, on the other, are both correct.

Alongside these key reports are others such as a stock overview report, an asset register, as well as aged creditor and debtor reports.

You’ll be able to see who you need to pursue most actively for payment and which of your creditors you’ll need to pay first.

Stay on top of inventory management

Ensuring you can meet clients’ needs while also avoiding cash being tied up in stock and paying out for storage is a difficult balance, especially when so much is uncertain in every sector.

Effective inventory management is vital. As with financial management, regular forecasting is useful. This involves frequent communication with customers and suppliers, as well as regular checks on market trends and analysis of past sales.

Supermarkets, for instance, are keen weather watchers as they want to know when to stock up on barbecue food and accessories – or hot chocolate and comfort foods.

Cloud-based inventory management software with real-time analytics is useful, as is any system that can utilise data to help generate actionable insights.

Adopt a ‘first in, first out’ approach to minimise the chances of perishable stock going off or other items losing their seasonal relevance.

Keep a closer eye on higher value items than those that have less capital tied up in them. Anticipate reordering requirements even if you’re not actually placing an order at this point, so you can give suppliers some notice for when you do.

Check your receiving process is fast and efficient. This avoids newly arrived stock getting damaged, going off or being sent to the wrong place for storage.

At the other end of the process, as well making sure that orders are dispatched promptly and carefully, ensure you’re ready to dispose of dead stock.

This can free up new storage space more quickly and improve the opportunities for maximising any income potential for products that you can’t sell in the usual way.