Tips for Managing Cashflow Post COVID

In the wake of the COVID-19 pandemic, small to medium businesses are facing financial fragility, caused by a decline in consumer demand as restrictions continue. The full extent of the pandemic may not yet be known, but it is already having an impact on almost all industries, including the welding and fabrication sector. In the coming months, ensuring positive cashflow will be essential.

Gavan Ord, Manager of Business and Investment Policy at CPA Australia, said the widespread impacts of COVID-19 are unprecedented.

“Most businesses have had their cashflow impacted by the restrictions imposed to control the spread of COVID-19,” said Ord. “Usually smaller businesses have less fat in their cash position and can find it more difficult to raise extra cash, therefore they tend to feel cashflow pressures sooner than larger businesses.”

According to Ord, there are some simple techniques for businesses to focus on – review, change and plan – to manage cashflow and support the organisation into the future.

Review

The first step to achieving a positive cashflow should be to take a step backwards and understand the overall situation. A weekly cashflow forecast provides a constant review of a business’ current financial position. If the business does not have an accounting software, an accountant can assist with this review.

After the initial financial assessment, businesses should conduct a ‘whatif?’ analysis to measure how certain events like further restrictions or reduced projects after a lockdown may impact cashflow.

After these two steps have been completed, a suite of other steps can be conducted to improve a business’ cashflow position, including:

• Focusing attention on sales that are paid at the point of purchase or paid early

• Quickening the collection of outstanding debts, including following up with debtors before the due date rather than waiting until the debt is overdue

• Reducing stock orders, particularly stock in low demand

• Seeking an extension to any payment terms with suppliers

• Considering introducing an up-front deposit requirement for critical items required by customers

• Focusing on marketing products that are more likely to be sold quickly.

While there is government assistance, and banks and some suppliers are offering payment deferrals, Ord said the importance of constantly reviewing cash on hand is paramount for the future.

“While taking advantage of those deferrals can improve your cashflow in the short term, the amounts owed still have to be repaid at a later date. Be sure that you can repay those debts in a few months’ time – you don’t want to set yourself up for a bigger cashflow problem,” said Ord.

When conducting an analysis of the current cashflow, seek to minimise existing costs by reviewing cost structures and overheads.

Change

Once an initial review has been completed, small businesses should change processes where appropriate. Unlike large-scale businesses, smaller organisations may not have the flexibility to seek materials from other suppliers.

Supply chain management and changing logistics may also need to be considered in the review stage and altered if there is an over reliance on certain materials from one manufacturer.

“An increased focus on supply chain risk potentially opens up new opportunities for local manufacturers,” Ord said.

Small businesses should also consider how to leverage their expertise into other areas where there is high demand and move some parts of the business online where appropriate.

Matthew Prouse, Head of Industry at Xero, said that despite the economic impacts of COVID-19, there are also opportunities for small businesses.

“The resilience and flexibility of small businesses is also creating new opportunities for small businesses to innovate and provide new services,” Prouse said.

Businesses should consider changing operating processes to ensure that they are running as efficiently and effectively as possible during the pandemic.

“Keep an eye on the changing needs of your customers and be open to further adapting your business,” Prouse said.

Data collection in the review stage should also shine a light on business performance to provide an indication for areas of improvement and how to meet key performance indicators in the future.

Prouse said building a timeline that focuses on the high-value tasks is also an important step for returning strength to operations.

Plan

As existing work dries up or becomes completed, new projects are required. However, the COVID-19 crisis may have altered the routine of a constant workflow for some manufacturing organisations.

Ord suggests taking actions if orders are drying up, and planning for a new normal, which could include:

• Increasing marketing spend

• Discounting products

• Contacting key customers to see if they have work

• Moving more of the business online to communicate with customers

• Thinking outside the box and assessing whether undertaking different work that is in high demand is viable.

Keep an eye on the changing needs of your customers and be open to further adapting your business

“It is important to keep on top of your forward orders so that you can act early if your orders dry up,” Ord said.

Ord said businesses should not expect to come out of this pandemic in the same way that they went in. “The business they have after COVID-19 will be different to the business they had before the pandemic. Businesses that get on the front foot and spend time thinking and planning their future are much more likely to succeed on the other side of the crisis.”

Similarly, Prouse said there is support available to help small business owners during this difficult time. “Work with your accountant to have a clear cashflow forecast in place. Find out when any debt is payable, reduce unnecessary spending, and recast your budget to reflect the new reality,” he said.