Coronavirus: How to manage cash flow as we emerge from lockdown

The current climate is challenging for many businesses, with lockdown measures meaning that your volume of work may have reduced, or you may have been forced to close entirely.

With lockdown measures easing and more businesses now opening, rebuilding and recovering is essential to ensure the future of your business.

One key aspect will be managing cashflow, at a time when income may have reduced, it’s important to manage your cashflow effectively to plan effectively for the coming months.

With many businesses now bringing back furloughed employees, whether full-time, or part-time through the Flexible Furlough system, these costs will need to be factored into your cashflow, particularly if you are awaiting any payments, or if your outgoings are exceeding your income.

Poor cashflow is one of the greatest aggravating factors in business insolvency. With the most recent statistics suggesting that the late payment of invoices is the cause of one in five company insolvencies, getting cashflow right could be the fine line between failure and success.

Unfortunately, getting cashflow right is easier said than done.

What exactly does cashflow mean?

Cashflow is the incoming and outgoing stream of money. If you have more money coming in than money going out, the result will be a surplus of cash. If you have less money coming in and more money going out, you have, well, a problem.

A lack of cashflow can cause serious issues, from not being able to keep the lights on to not having enough cash to pay employees. Negative cashflow can also cause a chain reaction of bad debt down the supply chain, which is why the problem often starts at the very top of the pyramid: global companies with poor payment terms.

While big companies are the single major cause of cashflow problems among the small business community, what they do is entirely out of our control. That’s why we need to think smartly about our own business decisions.

We believe that good cashflow requires three elements: planning, predictions and due diligence.

We can plan, for example, how our cash is going to be spent months, and even years ahead. Rent, energy, payroll, debt repayments and the cost of doing trade are all typical outgoings we can feed into the cashflow equation. We’ve listed some – but certainly not all – business outgoings below:

  • Daily expenses (raw materials etc)
  • Property costs
  • Energy and utility bills
  • Payroll
  • Loan repayments
  • Professional fees
  • Insurance
  • Travel expenses
  • Taxes
  • Vehicles
  • Marketing and advertising costs
  • One-off expenses (e.g. the office Christmas party)
  • Emergencies and repairs
  • Planned investment and upgrades

We can also plan – and conduct due diligence – on who we do business with. For example, winning a large contract with a big business known for its financial tardiness may not be a smart use of your resources. You may be better off securing several smaller contracts with reliable businesses, spreading the risk, building relationships and most importantly, assuring a good flow of cash.

Projections and planning for the unexpected are all the different moving parts an advisor can help you with, as you’ll want them to be as accurate and comprehensive as possible to create a precise cashflow model.

As cashflow is the balance of income and outgoings, the next step is working out your income.

Again, work with an advisor to calculate your income, as they will be able to generate extremely accurate income projections based on your historical financial data, as well as future financial predictions.

The next part is simple: subtract, month by month, outgoings from income. You can now use this information to make better-informed decisions on whether you should cut back on expenditure, invest surplus money elsewhere, or take extra cash out of your business.

For help and advice, contact our expert team at Knights Lowe today.

Further reading

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