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What you need to know about managing cash flow after COVID-19

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Poor cash flow management has been the death knell for many small businesses over the years, making successful cash flow management a very important part of building a sustainable business. Like many business owners, 20 years ago when I was running my own business I didn’t take the entrepreneurial step because I was especially excited about bookkeeping and accounting, but it became a big part of how I spent a lot of my time. In today’s economy, effective cash flow management after COVID-19 is more important than ever.

There are 5 business metrics that have a direct impact on a business’s cash flow and every business owner should understand how they interact with each other. I have no doubts that these five metrics are the cornerstone of a successful business and an essential part of post COVID-19 cash flow management. Some are more obvious than others, but they all work together to maintain the lifeblood of any small business.

Metric # 1: Income

Every business owner understands the importance of a constant stream of income in a business. Probably the biggest challenge small business owners face today is the drop in income they suffered during the shutdown caused by COVID-19. As a result, careful accounting of the income coming into the business is more important than ever. I tracked this number daily, weekly, monthly, quarterly, and annually so that I could make assumptions about what to expect and forecast how we were doing.

While forecasting in the midst of our current health and economic crisis has become much more difficult, it’s more important than ever to accurately track your income. Fortunately, this is a fairly easy metric to follow. Moreover, the following four measures mean nothing without it.

Metric # 2: Expenses

Understanding your spending tells you how much it costs you to do business. If you are unsure, your accountant can help you categorize your expenses. For example, some costs are related to the cost of producing your product or service, while other costs are fixed costs like those associated with where you do business and the facilities that allow you to do business. The difference between your costs and your income determines whether your business is profitable or not.

In economic situations like this, expense management, even micro-expense management, is of critical importance. Normally, I would suggest measuring each expense against questions like, “Is this expense helping me generate more ROI?” Or “Does this expense add value to my business?” Today, I also think we should ask ourselves, “Will this expense help me keep my doors open?” And, I would put the latter at the top of my list these days.

Obviously, some business expenses are more critical than others and may require a little belt tightening on the part of everyone, including your employees. When I have had to navigate situations like this in the past, anything that could be considered a “good to have” was eliminated from budgetary considerations. Now is the time to spend only on these “must haves” right now.

Because your main goal here is to manage expenses to protect your cash flow, don’t forget to consider the role your suppliers can play, they can play an important role in managing cash flow after COVID-19. None of your suppliers want you to close your doors either, so it’s time to negotiate with them for better terms. Maybe it will change from 30 day terms to 60 day terms. Maybe it’s a matter of establishing a just-in-time storage agreement with them so that you only tie up your cash on the items that you are selling right now and that your supplier is storing for you. Leverage your best relationships to extend your terms and protect your income.

Measure 3: Aging of customer accounts

Don’t ignore this metric.

If you give your customers credit terms to pay for the products or services they buy, do they consistently pay on time? For example, if you offer 30-day terms, do they regularly take 45 or 60 days to pay their bills?

Every business is different, but I found that after 45 days the impact on my cash flow made me start losing profits and after 65 days my profits were completely gone. Additionally, I found that for every day over 40 days an invoice was overdue, it became all the more difficult to collect. It didn’t leave me many options, I either had to increase my prices to cover customers who didn’t pay on time, or stop selling to those customers with payment terms, or cut them altogether.

None of these options were very appealing to me at the time.

I have gone to great lengths to make sure my clients pay their bills on time. I started calling them regularly after 30 days, offered discounts to customers who paid early, and eventually customers who refused to pay their bills as agreed either went to checkout or had to cut them off. completely.

Fortunately, most people, when I explained to them the impact of late payments on the health of my business, they appreciated what I was doing for them enough to pay their bills on time, but there were a few – ones that cost me dearly to do business with them and I had to make the difficult decision to stop working with them.

Measure 4: Aging of accounts payable

If your suppliers offer you early payment discounts and you take advantage of them, you can effectively reduce the costs of the goods or services you provide. I know of more than one small business that is able to save enough money this way the rebate covers a large portion of their payroll.

If you have a supplier who does not want to extend their payment terms as stated above, they might offer you a discount for early payment — 10 days, 20 days, and so on. The discount on your bill could make a lot of sense depending on your cash flow situation.

Indicator # 5: your cash flow indicator

It might be the last on the list, but it’s a valuable tool to help you manage your cash flow effectively. As your business earns income, that income becomes an asset among all of your other business assets. Expenses become liabilities, included among all other business liabilities. Your assets and liabilities help you determine whether you are headed for profitability or for extinction. After COVID-19, be good friends with your cash flow metric.

You calculate your cash flow metric by dividing your assets and liabilities. This is such an important measure, if you are not sure about it I suggest you talk to your accountant. The ideal for this metric is 2: 1, which is twice as many assets as you have liabilities. This can be a challenge for many new or smaller small businesses, but anything less than 1: 1 tells you that it costs more to do business than to earn, even if you have money in it. bank at the end of the month. If your metric is less than 1: 1, in the long run, you will not be able to maintain business operations.

Income, expenses, accounts receivable age, and accounts payable age all feed into your cash flow metric. Understanding how they all interact will help you weather the coronavirus storm and get out safely to the other side. Even at the best of times, it takes discipline, but it’s even more important now in uncertain times like these.

This article was originally written on May 18, 2020.

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