April 29, 2020 What Now? Focus on Cash Flow

Cash flow management is the key to your business’ recovery.

By James Wolcott

Your applications for the Paycheck Protection Program or Economic Injury Disaster Loan have been submitted. You’ve consulted with your accountants concerning tax relief opportunities. Stimulus funding is coming, but you’re not sure how long it will take, or how long it will keep you above water. The thing to do now is focus on your business’ survival and recovery plan. And the first step is shoring up cash flow, the most fundamental need of any business.

Having a clear understanding of your business’ cash position and drivers of liquidity is always important, particularly in periods of financial duress. Below are three steps to help businesses not only stay ahead of cash shortfalls, but also improve competitive advantage and position themselves for growth upon economic stabilization.

Business leaders should establish a method for tracking and proactively monitoring cash flow on a regular basis.

1. Arm yourself with the right cash flow management tools

Real-time understanding of current, short-term and long-term cash positioning is critical, and having the right tools to do this is key. A business’ current and future cash position can and should be tracked on a weekly, monthly and quarterly basis. But the same tool shouldn’t be used for all three functions due to variance and functionality of required inputs and reporting outputs.

For example, a weekly cash management tool requires up-to-the-minute, accurate information relating to vendor disbursements and customer payments, whereas a quarterly tool is used for improving a business’ operating model, understanding future capital requirements and potentially lender negotiations. In other words, your quarterly forecasting tool, more commonly referred to as a 13-week cash flow model, is based more on expected (versus “known”) inflows and outflows.

Finally, a monthly tool looks at historical performance over the past 30 days and compares it to what was forecasted. Use monthly performance as a baseline for your 13-week cash flow model and adjust your forecast as needed.

The key is to have a method for tracking all of the above and proactively monitoring cash flow on a regular basis. If you don’t have the resources to develop these tools, find a qualified consultant who both understands your industry and has experience in business recovery.

2. Assess and prioritize cash flow improvement opportunities

Depending on which industry your business operates in, there are various levers that can increase liquidity. Perhaps the quickest and most effective way of improving a business’ cash position is to understand its cash conversion cycle and its levers (Days Sales Outstanding + Days Inventory Outstanding – Days Payment Outstanding). In comparison to industry benchmarks, this information can yield quick insight about the impact of improving management of your business’ liquidity. The caveat here is that it will likely require tough conversations with both customers and vendors, so make sure you’ve done the right analysis and come to the negotiating table prepared.

3. Understand financing requirements and thresholds

For many businesses, economic stimulus loans and cost reduction efforts will not be enough. A prolonged duration of reduced sales coupled with high fixed costs can cripple a business.

While it may be tempting to jump at the first financing offered (not including stimulus money), it’s a good idea to first lay out how you plan to use the capital, which will help determine the type of financing your business should seek. Common uses include covering short-term cash needs such as debts, accounts payable, and other obligations that are due within one year.

Most banks offer working capital lines of credit to cover short-term needs, and typically require verification of the business operator’s credit history, as well as regular monitoring of the company’s collateral (typically accounts receivable and inventory).

Another common source of financing is supply chain financing. Through supply chain financing, a business can extend payment terms while benefiting its supplier by reducing the supplier’s cost of financing its receivables. In these arrangements, an external finance provider settles the supplier invoices in advance of the invoice maturity date, capitalizing on a buyer’s stronger credit rating to extend payment terms to vendors for a lower financing cost than the supplier’s own funding source.

Both working capital and supply chain financing are good options for businesses with these specific needs; however, the financing comes at both a cost (in the form of interest and bank fees) and with prohibitive provisions (in the form of loan covenants), so it is important for businesses to understand how the financing will impact both the company’s financial performance and its operating model.

As we come to grips with our “new normal,” it’s important to take proactive steps to not only position your business to survive but also to use this business recovery cycle as an opportunity to gain competitive advantage so that you can thrive in the future.

James Wolcott

About the Author:
James Wolcott is a principal at CPA and advisory firm Kaufman Rossin, where he leads the firm’s business consulting services practice and mergers and acquisitions industry advisory group. He has provided consulting services to many of the world’s leading organizations on issues of strategy, capital advisory and financial planning and analysis. James can be reached at jwolcott@kaufmanrossin.com.

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