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2020’s must-know business cash flow management tips 

BlogEnterpriseYour business By Duncan Khoury – 23 June 2020

You’re probably sick of the phrase “in these uncertain times.” But unfortunately it sums up the current situation well. Times are uncertain, and what worked well for your business in 2019 may not right now.

Because of this, most things you’ve learnt about managing cash flow probably now seem out-of-date. Cash flow management is all about accurately predicting what will happen in the short term, based on what has happened in the past. The problem is that in a COVID-19-dominated world, past trends aren’t necessarily a great predictor of what will happen in the next six months. 

So what can you do? Let’s examine a few top tips, including factoring solutions, creating a short-term cash runway, and increasing communication both internally and externally.

Get your business cash flow back on track

You need to understand how to manage business cash flow at any time. Failing to do so can put your business under severe strain. For example, of the 8,000+ companies that declared insolvency in 2018/19, more than half – 51%  – reported inadequate cash flow as the reason.

But, particularly with the way COVID-19 has disrupted business supply chains across the world, getting a handle on your cash flow is essential. 

Here are six must-do actions to help get your business back on track right now. 

1. Create a short-term cash flow runway 

As we mentioned above, cash flow forecasting is about predicting what’s coming down the line – usually in the next 12-18 months. But with so much uncertainty and the rapid pace of change, there’s little point in creating a longer-term cash flow projection. 

Yes, it’s still important to have a general long-term plan. But right now, focus on creating a rolling three-month forecast, also known as a ‘short-term cash flow runway’. This is the only way to truly understand your cash flow while everything’s so uncertain. 

A short-term rolling forecast will help to keep you agile, enabling you to respond to changes as they happen. As a result, you’ll be able to better focus your attention on your present situation.

As part of the process of creating this forecast, review your current cash position with your finance team. Make sure you understand exactly what your outgoings will be for the next three months. Freeze any non-essential expenses – whether they’re capital expenses or not. If necessary, speak to your suppliers to see if you can change your existing payment arrangements. 

This should then help to free up cash flow to ride out the next period.

2. Get everyone in the room 

Whether it’s in a virtual or physical room, gather your finance, sales/marketing and operations teams together weekly. Everyone needs to work with each other closely – there’s no place for information silos in this environment. 

You’ll need to make decisions with input from all parties. For example:

  • your sales and marketing team will need to feed back customer sentiment insights, sales data and acquisition pipeline expectations. Digital and other measurable channels are also great sources of timely market demand and search information
  • your operations team will need to take that feedback into account with their production planning
  • your finance team needs to support both parties by running more scenario models and walking your sales and operations decision-makers through their projections.

Cash flow responsibility can’t sit solely with the finance team anymore. Everyone needs to play their part, but your finance team can help by:

  • making their reports and models easy to understand 
  • translating the details for decision-makers whose eyes often glaze over when they see pages of numbers.

3. Ramp up communication across your whole supply chain

We’re all in this together, which means your suppliers and buyers are probably struggling to keep up with all these changes too. So talk to them. Find out what position they’re in. This can then help you to forecast your own cash flow. 

You may discover opportunities for customers to pay you earlier in return for a discount. Alternatively, you may discover you can shorten your credit terms due to increased demand for your product. You may even be able to:

  • negotiate deferred payments for stock you haven’t yet received
  • build flexibility into your supplier contracts
  • rewrite your terms and conditions to formalise more favourable payment terms to move into the future in a stronger position.

Improving your supply chain and building a better relationship with your suppliers will also help you on the road to recovery. A ‘business-as-usual’ market simply won’t resume overnight, and demand and supply will swing back and forth before they find their new normal. 

That means you’ll need to keep having these conversations. 

4. Challenge the status quo

This is the perfect time to reassess how you do business to improve your cash flow – both for now, and in the future. For example:

  • Do you need to keep so much stock-on-hand? 
  • Can you change your payment terms? 
  • In your discussions between sales, operations and finance, can you uncover a new standard that you can move toward? 

Perhaps your business could benefit from smaller, more frequent orders, or from negotiating extended payment terms with suppliers. 

Having these conversations to challenge the status quo has never been more vital. The decisions you make won’t just help you in the short-term. They’ll also position your business for a stronger future. For example, reducing your order size may save you significant warehouse and storage costs going forward.

5. Identify alternative sales channels

While you’re challenging the status quo, explore new ways to sell your products. If your physical stores have had to close, what steps can you take to ensure that more of your sales are made online? If your regular customer base is experiencing a significant downturn, how can you find new sales opportunities?

Even after the market has substantially recovered, techniques that worked before won’t necessarily work in the future. This even extends to how we work, as this article from Forbes discusses. New ways of doing business now may continue to help you bring in income in the future. For example, many restaurants and cafes that started to offer takeaway or home-delivery services during lockdown may continue doing so even after customers return to dining in. 

Be proactive and find your diversified place in the post-COVID-19 world to keep that cash flow coming in. You need to be aware that some of these new channels may be winners, while others may be losers. Either way, you need to put on your entrepreneurial hat and be flexible enough to experiment.

6. Speed up your access to cash

Fast access to your accounts receivables can make a big difference to your business success. What if you got paid as soon as you sent an invoice? Or even an average of 10 days earlier than you get paid now? How could that change your cash flow position? Now there’s a conversation to have with your finance team!

As one example, a factoring solution like Octet’s Debtor Finance can improve your cash flow by funding your accounts receivable within 24 hours. 

What is factoring? Also known as invoice discounting, it effectively means your customers pay you within 24 hours – on time, every time. You can then use that money to:

  • pay your bills
  • buy supplies or equipment
  • even grow your business via talent, technology or competitor acquisition (if your management team agrees that it’s a smart move right now).

Even just automating your invoicing process to send reminders as soon as invoices are overdue can have a huge impact on how quickly you receive your money. That means you can get on with growing your business without stressing about your finances.

Take control of your cash flow in 2020

Understanding your cash flow in detail is the key to weathering the current economic crisis. 

That means:

  • focusing on the next three month period
  • communicating clearly, both internally and externally
  • identifying new ways of doing business
  • increasing how quickly you get your money with working capital solutions.

Together, these tips will help your business to sail through the storm with minimal disruption.

Interested in how working capital solutions can help you take control of your cash flow? 

Talk to us today.