May 26, 2020
Cash Flow Management Tips During COVID-19 | Proweaver, Inc.
Early January 2020, China announced the outbreak of a viral pneumonia infecting over 44 individuals in Wuhan, Hubei province. Months later, over 4 million individuals have been infected worldwide and almost 300, 000 were declared dead. The COVID-19 pandemic has truly pushed the entire world into survival mode. Businesses, schools, transportation, and even government offices were forced to temporarily halt operations. Now, with the prolonged quarantine, governments are faced with the challenge of balancing the interests of the health and business sectors.
Due to the threat of COVID-19, a lot of business processes have been severely affected. Although some were allowed to continue physical, on-site operations, a lot of non-essential sectors were forced to completely stop operations. This has led to a massive disruption to global economic activity, with a projected 32% plunge in global trade. Studies also suggest that over 7.5 million businesses are at risk of closing in the United States alone. According to statistics from the International Labor Organization (ILO), 2.64 billion workers worldwide are severely affected by the ongoing economic plunge. Whether it be in terms of economic security or health, the pandemic is compromising lives around the globe. As stated by ILO Director-General, “[w]orkers and businesses are facing catastrophe, in both developed and developing economies[.]”
This is why, regardless of challenges to operations, businesses must find ways to keep the world economy running. As a result of the need to innovate, COVID-19 has forced a lot of businesses to become more adaptive and proactive in finding ways to keep businesses running. For a lot of small and medium businesses, cash flow remains to be one of the most critical components in ensuring business continuity.
Understanding Cash Flow
Cash flow can make or break any business. In essence, businesses are borne out of the need to generate income. However, this requires a delicate balance between the cash going out for production and the cash coming in from profit. Without the right balance of cash flow, a business is in a sure path towards bankruptcy. If more cash is going out to production and investment compared to the profit being earned, then a lot of what is “earned” by a certain firm goes right back to business processes. It does not genuinely produce returns for the company. This problem has been one of the leading causes of business closure in recent years. For this very reason, understanding proper cash flow management is a necessity in dealing with COVID-19.
Defined, cash flow typically refers to the movement of funds within a company. There are two kinds of cash flows that every business should be mindful of:
1.Positive Cash Flow
- This refers to the kind of cash movement that each company strives to have. Here, the balance is tipped towards cash entering the business, rather than going out. This is when your business income completely offsets business costs. The sales, accounts, profits, etc. exceed the payables, monthly expenses, salaries, bills, etc. of a company.
2. Negative Cash Flow
- A business has a negative cash flow when the business is costing more than what it is earning. When this happens, a business has to properly assess their business model to see the possible remedies for their negative cash flow. These measures may include improved cash generation or reduced business processes cost.
Achieving a Positive Cash Flow
In handling a business, it is important to understand that almost nothing occurs just by chance. Although a lot of businesses hit a lucky break every once in a while, these could be considered as isolated cases. Oftentimes, positive cash flow is the key to business success. This could be done by properly analyzing, understanding, and strategizing towards the better cash in than cash out. According to the US’ Small Business Association (SBA), every month, businesses should strive to generate enough cash output to cover all the expenses for the month and for the month after that. Reaching that level of positive cash flow better ensures business security and continuity.
Although the concept of positive cash flow seems simple, this is merely the tip of the iceberg. A lot of factors come in when considering cash flow. In order to grow, businesses must find ways to improve processes and prevent stagnation. Pushing for business development will, naturally, cost cash. This is the second level of balancing businesses must do to ensure continued profitability. CPA, author, and Chief Financial Officer Philip Campbell said that growing a business puts a huge strain on cash. Businesses must first be willing to spend on smart investments to gain. Over time, investments will reveal their true nature to business owners. They can lead to a huge business loss or a catalyst for business growth and success. In fact, sometimes, a bad investment may lead to bankruptcy and closure for many small to medium businesses that are not resilient enough to deal with huge economic losses.
Assessing Your Business’ Cash Flow
The biggest business sin is not being able to identify the current condition of your cash flow. In order to properly assess whether or not your business is on the right track, Campbell suggests to ask the following diagnostic questions:
- What is my company’s current cash balance?
- Where is my cash balance heading in the next six months?
If you are unable to derive the answers to the questions above, you currently have no control over your business’ cash flow. This means that the clock is ticking, and you have to act quickly and smartly. The first thing you need to know is the current cash flow of your company. See the difference between the money going in and out of your company. Additionally, try to identify visible trends in your company’s cash flow. According to the problems identified, immediately set up business strategies to create a positive cash flow for your business.
For the best results, it would be best to track your cash flow on a monthly basis. While doing so, try to see whether or not your management is leading your company towards the cash flow you need. Create projections and strategies for both the long term and short term. Make sure you have clear business goals, and create your business plan according to the business decisions you have created with your managerial team. Additionally, you should make sure that you are able to determine when your business should pursue expansion and when it should focus on keeping income higher than costs. These are the different basics that each business needs to be aware of. However, how does COVID-19 affect the entire cash flow scheme?
Ways to Manage Cash Flow Disruptions Brought by COVID-19
Due to COVID-19, businesses of all sizes are currently struggling with both long term and short term economic disruptions. Profitability is no longer assured as low cash revenues and unstable cash flows have placed several businesses in a vulnerable position. According to economic projections, tourism, hospitality, transportation, and entertainment are currently hard-hit for the short term. Businesses in the retail, consumer, and perishable goods industry, however, are expected to sustain long term damages. What’s worse, at the moment, no one knows what the full extent of the damage will be. With COVID-19 still continually growing and with the vaccine months away, there’s no way to determine how long it will take for the supply and demand chain to return to normal.
Despite COVID-19 being one of the greatest challenges to the global economy in recent years, it is not an entirely new problem. World events in the early 2000s, including the 2003 SARS outbreak and the 2008 recession, have also severely affected the economy. That said, there are many lessons that could be taken from these past events. Ultimately, economic shifts require businesses to endure and find innovative ways to adapt and generate revenue.
Originally published at https://www.proweaver.com on May 26, 2020.
