The Irish government has launched a vast and unprecedented support programme to help businesses to survive the effects of coronavirus and 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 to the business 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 a look at 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 the current trading environment.
You’ll also have to factor in outgoings such as salary increases and the growth of other costs.
Once you’ve got a reasonable idea of how your sales are going to do, you’ll need to think about how much revenue this will bring in.
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 you’ll need to factor into your forecast that they usually take 60 days to pay or that they offer you a down payment.
Then identify your 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 the 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.
Clear view of your finances
This 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.
Use what’s currently happening in the business to correct any assumptions and forward views you made when producing the forecast.
It’s also important as a general rule – but especially so in these uncertain times – to stress test your projections.
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 find that you have to repair or buy a new piece of equipment?
Webinar: Coronavirus business financial support
Join our free webinar to understand what Irish government financial help is available and how to access it.
Review finance options
Reviewing your finance options and sources of extra investment and cash injection is essential. The government has launched a series of financial measures to support businesses.
A series of loans, grants, voucher schemes and funds are available, as well as rates deferrals, so it’s worth exploring what is available, and what your business is eligible for.
Meanwhile, the big banks are playing their part too.
One such scheme is the COVID-19 Working Capital Loan Scheme, aimed at micro, small and medium-sized enterprises (SMEs).
It’s important to talk to your bank and your accountant, if you have one, as well as your industry body and others in your sector about accessing financial support.
Invoice finance and asset-based lending
When looking to manage your cash flow, one option to consider is invoice finance and asset-based lending. This 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.
Then there is invoice factoring. Here, you sell your unpaid invoices rather than waiting for the client to pay, usually for around 70% to 90% 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 1% 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 – including smaller ones where resources are more thinly spread more than most – into confusion, it’s easy to let financial reporting slip.
Reassuring customers, handling suppliers and managing staff working from home while keeping others safe is essential but so is ensuring that your financial reporting is up to date.
You’ll need to do this so 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, something that is particular important during times of uncertainty and volatility.
Keeping financial reporting up to date means keeping an eye on your balance sheet and making sure your assets and liabilities are all 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 that 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 that 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, aged creditor and debtor reports, and VAT 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.
Conclusion on managing cash flow
Managing cash flow effectively is vital for every business at any time but for SMEs during times of uncertainty and volatility it’s particularly important.
However, by scheduling an hour or two each week specifically to work on forecasts and look at incoming and outgoing cash, assets and liabilities, and by accessing professional help and advice, your business will be well placed to weather the current storm and benefit in the longer term.
Coronavirus and your business
We’ve gathered information and resources to help navigate this situation. You can also find out about support for Sage solutions, including enabling home working.
Recommended Next Read
Self-assessment FAQs: 7 answers to help you when filing your tax return
Subscribe to the Sage Advice newsletter
Join 1.5 million subscribers and get the best business admin strategies and tactics, as well as actionable advice to help your company thrive, in your inbox every month.