Changes to business activities due to the COVID-19 pandemic have left many business owners experiencing a decrease in cash flow. Although adopting new tactics have helped to remain in business, it is important to look at ways to get cash flow back on track while working towards normal business operations.
To do so, it is imperative that business owners consider a new strategy for the current economic events and make modifications to past operating and financial activities. Although it may be difficult to know where and how to begin this process, this blog will help by covering 6 things to keep in mind when trying to improve cash flow consistency in these uncertain times.
1. Understand What is Cash flow
In order to improve cash flow it is important to understand what it is.
Cash flow is the measurement of net cash and cash-equivalents being transferred in and out of a business during a specific period of time. Cash flow statements help to determine a company's health, capacity to pay liabilities, and ability to create value for shareholders based on the inflows a company generates during a given period.
Positive cash flow is when your business has more incoming (cash inflow) than outgoing (cash outflow) money, and can be gained from operating, investing and financing activities. As you would guess, negative cash flow on the other hand is when your business has more outgoing than incoming money, and this can come from things like operating expenses or maintenance.
Check out this overview video to learn about Statements of Cash Flows, and what they mean for your business. Learn what a cash flow statement is, how to read a cash flow statement and how to create a cash flow statement, with real-life examples.
Statements of Cash Flows 101
2. Recognize the Current Situation
The current economic situation
is unusual and uncertain, it is important to take a step back from what you are doing and gain a clear understanding of what your current cash flow position is. Make sure you look at the big picture and take into account various scenarios and potential losses. Understanding how long you can operate under these conditions is an important question to consider.
Becoming aware of your business’s net income and net cash will make it much more simple and realistic to Identify plausible actions if things get worse; for example, if sales continue to drop or if a supplier is no longer in business. This insight will help your business to be proactive instead of reactive; allowing you to adjust and prepare before a situation arises.
Along with Balance Sheets and Income Statements, Statements of Cash Flow are one of the three most important financial statements for managing your accounting and making sure you have enough cash to keep operating. It is important to look closely at Accounts Receivable, Accounts Payable, Balance Sheets, and Income Statements to get a good understanding of financials and the big picture. Make sure you pay close attention to your current and future capital expenditures during your accounting period; this way your business will be able to prepare and budget.
Keep These KPIs In Mind As You Get Back To Business
3. Prioritize Goals
Cash flow comes in three forms:
- Cash Flow from Operating Activities: created by core company activities
- Cash Flow from Investing Activities: purchases of capital assets and investments
- Cash Flow from Financing Activities: gained from issuing debt, equity, and payments made by a company
When prioritizing goals it is important to consider these three forms of cash flow and understand how to focus on these when building a new financial strategy.
Try to look at each form individually and analyze one before focusing on another, this will help to have a clear understanding as well as stay focused on one thing at a time.
When creating goals it is a good idea to utilize Financial Forecasting, this can help you to estimate your business’s future financial health by looking at past financial data and reports. Although forecasting may not be as accurate right now due to such a shift in business activities, it can give you an overall idea, help you to get your business back on track financially, and assist with how to alter your budget plan after COVID-19 to be better prepared for potential future emergencies.
4. Create New Offerings or Bundle Products
In the past, companies struggling with cash flow would often increase pricing due to the financial strain they are dealing with. In current times, adjusting pricing substaintaly can be seen as a poor decision on a business, due to income changes for customers. Many customers may have lost their jobs, or have been experiencing other financial burdens during this crisis, and although adjusting price may seem like an easier option customers could see this negatively and choose to support a competitor instead.
One alternative way you can work around increasing price is creating new products/ services, or marketing existing offerings as bundles; including features that don't hurt your profit margins, but add value to the customer. If you are a seller of services you may consider creating/offering a lower-tier service. This helps to increase margins, while giving customers a clear value added bonus.
5. Presell Products and/or Services
It is important when trying to create cash flow generation to be mindful that this is a difficult time for all companies, customers and prospects. A way to benefit both parties is to offer products and/or services at a discounted rate. Again, as a way for customers to see value added in your offerings.
If you are not able to discount the product or service itself, offering a discount on early payments may help to keep your cash flow steady; rather than waiting around on old invoices remaining unpaid. These options allow your customer/ prospects to receive a deal on your offerings while increasing the amount of cash available to keep your business running. Having these offerings available for a limited time also can help to increase cash flows quickly, encourage a quicker buying behaviour for customers.
6. Plan for the Future Unknown
Although we are hoping this pandemic will be over in the near future, it is unpredictable and we must prepare as if it is our new reality. Plan ways to have consistent cash flow in order to be in a stronger situation down the line. What you implement and encourage now should be a strategy that remains in place; even when businesses are able to return to work as usual. Continuing procedures, strategies, and activities learnt during the pandemic will help to stay prepared if another emergency were to arise.
The Bottom Line
Healthy cash flow is the result of operations that run efficiently and effectively. While working on improving cash flow, it is important to consider decisions regarding your other business departments such as marketing, customer service, new customer acquisition, and research and development. The economy is constantly changing and this is why it's crucial to review and update your business plan and strategy on a regular basis; ensuring you are prepared to anticipate trends and challenges before they impact your profitability.
