What Now? Focus on Cash Flow


Cash flow management is the key to your business’ recovery

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. Congress is discussing supplemental stimulus programs, but still only at a high level. The only 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.

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’s 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. For example, a business can improve above the line performance (i.e., gross profits) by increasing sales volume or pricing, and decreasing cost of sales, but this can prove difficult in periods when customers and vendors are dealing with their own uncertainties. In addition, businesses can also look to improve their cost structure and degree of operating leverage through strategic sourcing or reorganization initiatives; however, these initiatives require significant attention and participation of management, who may not have the bandwidth to focus on these efforts.

Perhaps the quickest and most effective way of improving a business’s cash position ist 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. Currently businesses operating in industries such as travel and leisure, hospitality and transportation are particularly vulnerable in this regard.

And while it may be tempting to go into panic mode and 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 that helps extend a business’ payment terms without putting a strain on its relationship with vendors 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 the global economic situation starts to stabilize and 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.

Contact me or another member of Kaufman Rossin’s business consulting services team for help with preparing your business to come out of this crisis ready for growth and future success.

James Wolcott is a Business Consulting Services Principal at Kaufman Rossin, one of the Top 100 CPA and advisory firms in the U.S.

  1. raquel pereda says:

    I would llike to attend this Friday’s session. could you send me an invite please to rpereda@btipartners.com

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