While the full impact of the coronavirus crisis is yet to be assessed, one of the biggest challenges that UK SMEs are facing right now is managing cash flow. Some of the biggest cash outlays that a business will have to deal with during this crisis are fixed recurring costs. If a business chooses to continue operations despite the reduction in sales, they will still have to pay their usual rent, insurance, and utility bills as well as their employees’ salaries. These fixed costs will easily deplete a business’ cash reserves in just a few months.
Another significant expense for SMEs is the cost of carrying inventory. A business may have temporarily halted operations to save money on office-related expenses, but if they already have a surplus of products or supplies, they will still have to pay storage expenses.
In terms of cash inflow, the most obvious effect is the reduction in sales and profits due to lockdown. Some contracts may have to be revised to account for supply chain delays while others will have to be closed down prematurely. Businesses will also have difficulties in collecting receivables. For instance, construction businesses that were not able to file preliminary notices prior to the pandemic will have a difficult time enforcing a mechanics lien and collecting payment.
Managing cash flow during the crisis
Given the importance of healthy cash flow in this time of uncertainty, business owners need to get in control of inflows and outlays before it's too late. Here are some tips on managing cash flow during the crisis:
1. Assess your current financial standing and plan ahead
One of the initial steps is to actually step back and take a look at your current finances. Look at how much of a cash cushion you actually have and calculate how long it will take before your fixed and variable expenses deplete your reserves. Consider some specific scenarios so you can understand how much cash you need and how long it will last depending on the situation. Take note of available financing options to support your cash flow.
In addition, consider your capital investment plans before the crisis started. If possible, you should postpone these acquisitions until the situation improves and spend only on necessities for the near term.
2. Expand work arrangements for employees
While the government has implemented strict guidelines for social distancing and staying at home as much as possible, some industries are deemed essential in the fight against COVID-19. If your business belongs to one of these industries, continuing your operations will mean investing in hygiene supplies and personal protective equipment for employees.
One way to soften the impact of these additional expenses is to implement more flexible work arrangements among some of your employees. Employees whose roles do not require presence in the office may work from home. If possible, your business can adopt a full work-from-home setup for the remainder of the crisis. Not only will you contribute significantly to slowing down the spread of the virus, but you'll also save on office expenses.
3. Create a rigorous and efficient collections process
Even before the pandemic, many of the cash flow issues experienced by SMEs stemmed from poor accounts receivable management. Business owners tend to sleep on the benefits of efficient accounts receivable management when cash flow is not a big concern. But with the pandemic intensifying and managing cash flow during the crisis becoming more important, you need to get on top of how your receivables are managed.
When acquiring new clients during the pandemic, factor in the current situation in your credit terms to reduce the risk of an unpaid invoice. In addition, improve your documentation and record-keeping. Any wrong information will lead to invoices being sent to the wrong recipients, causing delays until you find out the cause. Finally, practice the timely sending of invoices. The sooner you send an invoice, the sooner you will receive payment.
Effective cash flow management needs to be a critical part of your company’s overall coronavirus business continuity plan. It's crucial that your company is prepared, so take the time to ensure you are able to control your cash outlays, you have a thorough understanding of your finances, and that your collections process is rigorous and efficient.
About the Author:
Patrick Hogan is the CEO of Handle.com, a software company that helps contractors, subcontractors, and material suppliers with late payments. Handle.com also provides funding for construction businesses in the form of invoice factoring, material supply trade credit, and mechanics lien purchasing.