SMEs are particularly vulnerable to cash flow freezes, as they often don’t have the funds in reserve to manage fluctuations of payables. Luckily, there are ways to minimise your risk of negative cash flow during an unexpected event.
Here's quick recap of cash management and its importance, followed by seven effective strategies for improving your cash management during a crisis.
Key takeaways: Managing cash during a crisis
- Cash management is crucial during a crisis: you must ensure you can adequately meet your financial obligations. Implementing cash management strategies will reduce your business’s risk of serious financial hardship.
- Keeping lines of communication open is key, both with your payables and receivables. You need to know which customers will require leniency and inform your suppliers that you’re having cash flow issues to allow them time to prepare.
- The most effective cash management for navigating a crisis begins before an unexpected event occurs. Implement best practice techniques and set in place a robust cash flow system to prevent future disasters.
What is cash management?
Cash management, or cash flow management, is overseeing money (cash and non-cash) moving into and out of a business. When you have positive cash flow, it means there is more money coming in than what is going out. Negative cash flow is the reverse: more going out than coming in.
Efficient cash management is about ensuring you always have enough money to cover expenses. For most businesses, it’s also about making a profit. But achieving positive cash flow requires good planning, careful spending, and educated prioritisation of business activities.
Smart, effective cash flow management is the key to financial survival for businesses during times of crisis.
Why is cash management during a crisis so important?
During a crisis, it's important to have cash management strategies in place to mitigate the challenges manifested from those scenarios.
If your customers are unable to pay you then your own business could experience financial difficulty. Conversely, you may not be able to pay your employees or buy products to keep your shelves stocked.
More than 9 in 10 small businesses face at least one month of negative cash flow each year. In 2021, 23% of UK-based small businesses reported over six months of negative cash flow. Add to this 85% of businesses across 45 countries experienced a high or medium financial impact on their operations during the first year of the COVID-19 pandemic, yet only one-third of these had sufficient funding for recovery.
While almost all SMEs will go through periods of negative cash flow, times of crisis can intensify the challenge of cash flow management: The next unexpected event could be the make or break of your business.
- Learn more: 13 Cash Flow Management Tools for Your Business
7 strategies for managing cash during a crisis
Even when it’s ‘business-as-usual’, managing cash flow is about treading a balance of incomings and outgoings.
But during times of crisis, it’s likely you’ll need to change up the way you do things.
Below are seven strategies to consider.
1. Improve your Account Receivables Turnover (ART)
This step is about bringing more cash into the business as quickly as possible by making it easier and faster to get paid.
Here are five ways to speed up payments:
- Prioritise chasing up late payments. If you’re owed money by customers, this should be your first point of call. Even partial payments help with cash flow.
- Invoice more frequently. Rather than a single bill at the end of a sale, consider sending invoices at various stages of fulfilment/completion. You can change your processes to require down payments, instalments, retainers or even payment up-front.
- Make payment convenient. Offer as many ways to pay as possible, and ensure your invoices are clear and concise. Include due-by dates and, if applicable, penalties for non-payment.
- Implement early-payment discounts. While it may seem less than ideal to receive less money during a cash flow management crisis, discounted early payments are more helpful than a late payment (or worse, no payment at all). They’ll also encourage your customers to prioritise payments to you over their other bills.
- Accept pre-orders and deposits before production begins. As modelled by Tesla, this strategy can help increase cash flow in the short term. However, it comes with the risk of selling a product and later realising you’re unable to fulfil your promise of delivering it to the customer by a certain date.
If the crisis is global, there’s a good chance your customers (if you’re B2B) and suppliers are getting hit by cash flow challenges, too.
It’s important to keep those lines of communication open: You want to know if customers are going to have a problem paying you before the due date, so you can minimise any flow-on effects.
2. Negotiate with suppliers for your accounts payable
To slow the pace of money leaving your business, try to negotiate better payment terms with your suppliers.
Loyal suppliers should understand, and (if they can afford it) will likely allow for delayed payment, or partial payments, as you continue to manage your cash flow.
It’s best to give them as much time in advance to arrange flexible payment solutions. Prioritise open and honest communication to get the most from your supplier relationships.
Learn more: See how Unleashed software supports supplier management and streamlines purchasing.
Open communication and flexible payment terms throughout the supply chain will help to improve cash flow management during a crisis.
3. Spend time on your cash conversion cycle (CCC)
Understanding your cash conversion cycle metric will help you get clear on how long it takes to turn inventory into cash. And in a cash flow management crisis, it’s crucial for the CCC to happen as quickly as it can.
To reduce the length of your cash conversion cycle, consider these strategies:
- Move inventory ASAP. Inventory sitting on shelves is money tied up that you could otherwise be using to pay for your necessary outgoings. Using an inventory management system can help by monitoring a variety of factors that affect how fast your inventory moves.
- Speed up delivery times. The quicker a product gets to a customer, the sooner you can charge for it. Look for ways to improve the time it takes to get products from factory to customer and implement them.
- Encourage early payments with discounts. Just like with accounts receivable turnover (ART), you can bring cash into the business faster if you motivate people to pay earlier.
- Take a closer look at your order processes. Could there be more efficient ways to manage your inventory, and in turn your cash flow? Map out your entire fulfilment process and try to identify any bottlenecks that are slowing you down.
Learn more: 7 Cash Flow Metrics & KPIs You Should Be Tracking
4. Minimise nonessential spending and expenses
During a cash flow management crisis, all nonessential expenses need to be stopped or reduced as much as possible. This means minimising any costs that aren’t directly related to revenue-generating activities or the daily operations keeping your business open.
You should also identify ways you might be able to lower the cost of your essential bills.
Look into the following opportunities for cost-cutting:
- Electricity and other utilities
- Printing costs
- Technology
- Equipment leases
- Travel
While many of these may be necessary for your business to operate, you can still explore opportunities to bring costs down.
Proper planning and risk mitigation will prepare your business for managing cash flow effectively during a crisis.
5. Seek alternative income sources
Another method for improving cash flow during a crisis is to give your business a cash boost.
There are lots of ways to acquire more income, including:
- Business loans. If you’re predicting several months of negative cash flow, a business loan can help you survive. But be quick: lenders are less likely to give you a loan if you’ve already been struggling with cash flow for a long time.
- Lines of credit. Using a line of credit can help to bridge a short-term cash flow gap. For example, when you know you have receivables coming in on the 20th of the month, but you have a financial obligation prior to that, a line of credit will allow you to reallocate your available cash to where it’s needed most.
- Sell non-essential assets. Jump on Trademe or Facebook Marketplace and get rid of some of your unimportant assets. Although this won’t resolve issues completely, the extra cash will be there for you in case of an emergency.
- New revenue streams. While the pandemic had a largely negative impact on businesses, there were plenty who were able to pivot their offering and do so successfully. Take inspiration from their success and see if you can find new value to offer your customers.
- Raise investor capital. By selling equity in your business, you can help increase your working capital. This is a serious deal, however, and should be handled with the help of professional consultants.
To better manage cash flow during a crisis, seek alternative income streams such as business loans and lines of credit.
6. Establish best practices for your cash management
One of the best things you can do for cash flow management during a crisis is to ensure you have a robust cash flow system already in place.
First, use job costing to understand which areas of your business are most profitable and uncover any areas that are costing you more than they should.
Next, follow these tips for best practice cash flow management:
- Optimise your pricing structures for maximum profitability and sales.
- Negotiate long-term relationships and reliable lines of credit with your suppliers.
- If cash flow shortages have occurred in the past, identify the causes and mitigate them.
- Keep accurate and up-to-date income statements, balance sheets and cash flow statements.
- Use cash flow forecasting tools to actively prevent shortages of cash flow.
Maintaining your financial statements and cash flow regularly will provide you with insights you can use to your advantage during normal operating circumstances. It’ll also allow you to be one step ahead if the worst case should happen.
Monitor your key performance indicators to establish the best financial practices for your business. The better health your cash flow is in when a crisis happens, the better chance your business has of surviving without too much irreparable damage.
7. Always be prepared and act quickly to prevent issues
To minimise cash flow disruptions when crises occur, preparation is key. This means planning for a crisis before it happens.
Consider worst-case scenarios and move backwards from there. Identify the risks to your business, and the necessary steps to mitigate them, then create an action plan to put those prevention methods in place.
For organisations in the business of inventory, having robust inventory management software (like Unleashed) is essential during times of crisis. Ensuring stock levels reflect current supply-and-demand levels can prevent overstocking and understocking, both of which can have a detrimental effect on cash flow.
Being prepared also means identifying the trigger points where you need to take action before things get too bad. In times of crisis, you want to be able to act quickly and implement the cash flow strategies that will help you get through a lean period.
