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. This blog will cover 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 helps to determine a company's health, capacity to pay liabilities and ability to create value for shareholders.
Positive cash flow can be gained from operating, investing and financing activities.
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. 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. It is important to look at things like Accounts Receivable, Accounts Payable, Income Statements, and Balance Sheets to get a good understanding of financials. Make sure you pay close attention to your current and future capital expenditures; this way your business will be able to prepare and budget.
3. Prioritize Goals
Cash flow comes in three forms:
- Operating: created by core company activities
- Investing: purchases of capital assets and investments
- Financing: 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. 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 is not 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. 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.
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. 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.
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.