By Ben Hitchings and Christina Formenton
The COVID-19 outbreak presents many challenges and uncertainty for businesses.
During this time, it is critical for businesses to consider their liquidity and cash needs.
Cash management is an essential part of managing a business continuity plan during this time. This involves considering a range of measures in their operations and financial position to mitigate and minimise risks.
There are a number of ways that may assist your business in managing cash flow and your business plan during this time. In order to quantify the impact of these strategies it is important to use forecasting tools such as a Three-Way Cash flow modelling.
A three-way forecast is a tool that links three financial reports – Profit and Loss, Balance Sheet and Cash Flow reports to provide a greater understanding of your business’s future cash position.
The forecast provides an insight on the impact of business decisions prior to enacting them.
In the current situation, there are numerous ways of managing cash flow requirements as well as assistance available from banks and government bodies including the Australian Taxation Office (ATO).
To ensure you are using these effectively, a cash flow forecast can set out different scenarios so that you can choose the best options and maintain the financial health of you business.
In this current environment, it is crucial to regularly update the forecast to provide any warnings of cash flow problems so that you can act early and also obtain assistance at the earliest stage.
The forecast can assist your business in the following ways:
- Understand your balance sheet and consider the three working capital elements – receivables, payables and inventory.
- Businesses will need to work out a balance between these three areas so that there is sufficient use of cash to keep your business running.
- Consider the money owed by your customers, the recoverability of these and the impact on cash flow.
- It is critical to ensure that the collection process is working efficiently
- You may need to revisit the way your business manages receivables.
- Forecasting different ways of managing receivables may assist in predicting the cash you will receive from customers.
- Review cash owed to suppliers and forecast when these payments are due.
- It may be helpful to consider strategies extending the time taken to pay your suppliers is a way of preserving cash.
- Be aware, delaying payments may damage supply relationships so it is important to work with your suppliers to establish agreements in place.
- Review costing where possible and determine what your business currently needs to continuing operating in a forecast.
- This may involve deferring large capital expenditure, reducing fixed costs and switching to variable such as lease equipment instead of purchase.
- However, it is important to remember that these costs reduction should not risk a reduction in generating revenue or business reputation.
- Contact your landlord and negotiate your rent terms including a reduction, variation to existing lease terms, or no rent for a short period of time.
- When doing so, you should outline the impact on your business including how rent relief will assist your business.
- Forecasting different scenarios will assist in demonstrating this to your landlord.
- Please note that the government is reviewing the tenancy legislation and is expected to provide some relief for tenants with difficulty paying their rent.
- This involves looking at your business’s supply chain and considering if there may be any disruptions such as ability to obtain materials and delivery.
- It is critical to balance the need for buffer stock and holding cash in excess inventory.
- It is important to do a calculation/forecast of stock requirement needs for the future taking into consideration the lead time, the time it tastes to order and provide the goods/services to customers. Additionally, if in an industry with perishable products consider ways to decrease finished goods to reduce wastage.
- In this current environment, it is important to understand available financing options available if required.
- A reminder that previous options may not be available now so it is crucial to communicate regularly with your bank or finance provider.
- Some banks are offering deferral of loan repayments for a six-month period.
- This is an opportunity to use forecasting scenarios to better understand how additional or new financing options available would be of use to your business.
- The federal and state governments and ATO have announced various assistance such as job support loans and payroll tax relief and small business measures to support businesses during this time.
- It is important to understand and consider the different options available and forecast how the use of any assistance options impact on your business’s cash flow.
When communicating with external parties it is important to remember that you may be required to demonstrate and illustrate how COVID-19 will impact, or already has impacted your business. Many parties require forecasting tools to show the impact on your business. This allows you to effectively use the resources available be provided with assistance.
An Important Message
While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.