the accountant

Managing cash flows during COVID-19

Cash is king! Cash is the oxygen of any business! Cash is the lifeline of business! You can have a business registering double digit growth but if it doesn’t have liquidity you are toast.

I recently came across a LinkedIn post, which summed this up principles of working capital and cash flow management in three very simple points:

  • It is better to have cash than no cash
  • It is better to have cash earlier than later
  • It is better to have cheaper cash than more expensive cash

With cash flows under severe stress for most businesses, working capital management is the cheapest source of cash that any business, irrespective of its size can have access to. I have laid out some practical steps finance leadership teams can take to squeeze cash out of working capital.

Extend payment terms: Companies can preserve cash by extending payment terms with their suppliers and vendors. Unilateral decisions to force extensions on suppliers will most likely damage relationships with suppliers and at worse break supply chains, resulting in late deliveries and quality problems. I would recommend entering into a supplier financing program with suppliers through a paying agent. If structured properly this would most likely result in a win-win with extended payment terms for businesses and short term cash for suppliers and vendors as well, thereby managing their working capital cycle as well.

Exercise more rigor on payments by making sure that what is being is the right amount for goods and services. Controller teams need to double-check that there are no over payments for duties and taxes on purchases, especially as alternate international supply locations are used to keep supply chains running.

Stay on top of debtors, negotiate early settlements if possible with a discount or arrange repayment plans for those that are struggling to meet their obligations currently. Working with debtors to maximize recoveries and ensuring they are there in the long term will have a direct impact on cash flow and future sales.

Get the basics right, such as timely and accurate invoicing. Any errors in your billing process can lead to costly delays in receiving payments.

It is important to carefully consider the upstream and downstream impact of all actions. I have advocated for supply chain financing in the post, which can be expensive for small businesses, however a trade-off between cash and profitability seems like a fair one in short term when business survival is at stake.

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