Surviving COVID-19: How to Forecast and Manage Business Cashflow

By Rhys Roberts on 9 April 2020

The COVID-19 virus is making 2020 the toughest year ever in which to run a business in Australia (and in most other parts of the world). Many businesses are facing dramatic falls in revenue right now, and it is likely all businesses will be trading in a recession within the next few months.

Possibly the hardest part of all of this is the abruptness of the change: within a few weeks Australia has gone from “28 years without a recession” to a likelihood that unemployment will leap from 5% to 15% or more. That is some way short of the 30% unemployment rate during the Great Depression, but add to this up to half of the Australian workforce who are expected to be in jobs subsidised by the JobKeeper stimulus package and you get some idea of how bleak this is.

For those of us running small businesses the questions are “will my business survive this?”, and “what do I need to do to maximise the chance of that happening?”.

The one thing that is guaranteed to drive your business under is a lack of cash, and knowing not just your cash balance today but being able to predict what it will be in a month, in 2 or 3 months, and beyond will be critical to your ability to weather this crisis.

The following are my top 5 tips to manage your cashflow in the coming months.

  1. Maintain accurate real time financial figures, and USE THEM
    Ensure your accounts are up to date, and reconciled, no who owes you money and who you owe money to, know your monthly P&L result, and understand your balance sheet. If you need help with this GET IT. That might cost you money, but it can save you far more in the long run. It could even save your business.
    Our next blog post will cover just HOW to generate a cashflow forecast, and HOW to use that to make business decisions.
  2. Reduce outgoings where you can
    Can you trim unnecessary outgoings? Review your P&L line by line, look at what you can cut. Unpalatable as it may be, your biggest outgoing is likely to be wages – if the only way to save the business, and to save the jobs of everyone in it is to cut staff, that may be necessary. Also drill into every other line – can you negotiate a break on your rent, can you cut back on subscriptions, where else can you reduce outgoings?
    Another great way to retain cash right now is to avoid any capital expenditure, or if it is expenditure you MUST make, look at how you can finance this (refer tip #5).
    Note however that the various government subsidies in relation to Covid 19 may help you keeps staff onboard (again, tip #5).
  3. Manage working capital
    This is just a fancy way of saying managing those items at the top of your balance sheet: mainly what you are owed by your customers, and the inventory you own in your warehouse, and what you owe to your suppliers. If you can money in from customers more quickly than can boost your bank balance even as sale are falling. Similarly delaying payment to suppliers can help keep funds in the business, as can running down stock levels.
    It is worth keeping in mind though that as you delay paying a supplier, that supplier is trying to get you – their customer – to pay up quicker to improve their cash position. Taking a dog eat dog approach to this can be damaging to your business especially in the longer term.
  4. Additional revenue
    Is there any way – even in this difficult environment – that you can generate some additional revenue? Maybe new customers, or other services to existing customers? If you have been retailing, can you switch to selling on line? If you are selling services, is there some other service you can offer to your existing customers (something they need as a result of COVID-19 perhaps?)
  5. Other Sources of Funds
    That can include items such as debt or additional shareholder funds, or government subsidies. Whilst you need to be careful to not load your business up with more debt than it can sustain (refer back to tip #1 and the need for high quality financial information) in the short term debt can tide your business over, allowing you to pay wages, pay suppliers and keep trading.
    Sources of debt normally include banks or credit card, right now – and this is in relation to COVID-19 only, this is generally a really poor idea – you can access funds from the ATO by delaying payment to them.
    If appropriate you as the business owner can put money into the business.

Perhaps the key to many SMEs survival will be government funding via the PAYG Rebate and the Job Keeper subsidy. Each of these will provide significant funds to qualifying businesses.

In a blog post to follow we will drill into how to create a cashflow forecast, using a number of different techniques and tools.

Please contact Viridity if you need any further information on any of this, in the meantime please stay safe, and stay solvent!