Managing Cash flow During Difficult Business Cycle

The cliché Cash is King has never been so apt than now, the Corona Virus Pandemic has distorted revenue pipelines and starved business of cash to execute projects, almost tending to bankruptcy for some.

Most businesses have watched their cash flow thin out and plans going downhill. business owners understand that cash is the lifeblood of an enterprise routine operational activities such as purchasing supplies, paying salaries, and paying bills depend on its availability

Cash flow refers to the total amount of money that is generated and expended by a business and determines the liquidity of the organization.

For small and medium businesses, the ability to generate sufficient cash and manage liquidity will be a deciding factor whether it survives the shock and aftershock of the difficult economic cycle caused by the pandemic.

During economic downturns cash flow generation might be limited due to the drop in sales or revenue, disruption in supply-chain, large inventories tying down cash, and growing receivables. More precarious   is the fact that banks and other lenders become more cautious in the grant of credit to business at such times to ensure preservation of the depositor’s funds from high risk ventures.

Small and medium Scale businesses taking the foregoing into consideration must implement certain strategic cash management measures to keep them afloat during this period.

Identify the Income generation and expenditure points

Sources of cash are those activities that are cash-generating and use of cash are the ones that reduce the money in the business. E.g.  Credit from Customers is a source of cash generation while an example of a use of cash is the purchase of a van for the business.

Understanding how cash comes into and leaves your business will help you decide how to restructure activities to keep liquidity robust enough to support operation. In the instance above, the firm owner can decide to delay the purchase of the van and leverage credit from suppliers to generate the cash it needs or conserve its cash buffers.

Carry out a risk assessment to business cash flow

After mapping out cash inflow and outflow in the day-to-day running of the business, owners and managers need to understand the various types of risk to their cash flow that they face. The risk to the liquidity position of a business can emanate from shocks to revenue, high-cost structures, “too early” settlement of obligations, and debtors that are slow in clearing out their liability to the business.

These challenges must be ranked in a way that reflects their probabilities and likely impact on the firm. By doing this, the business has an airtight framework to help in designing a strategy that will limit their risk of going-under due to insufficient funds.

When it is the case that slow sales are stifling cash inflow, the business can seek out other revenue streams to keep money coming in. Businesses into perfume production that shifted to the production of sanitizers is a clear instance of how practical and helpful this step is.

Next, if it is a problem of the cost burden, then those businesses can work to delay the settlement of those obligations and digitize some of their processes to reduce their expenses.

On the other hand, there is no one way to deal with the problem of receivables that have been delayed. The business owner can try to negotiate incentives like a discount to encourage debtors to pay early.

Keep an eye on your Cash Conversion Cycle (CCC)

Cash Conversion Cycle (CCC) is the number of days it takes for a business to convert its investments in inventory into cash. Investopedia defines it as how fast a company can convert cash on hand into more cash on hand.

CCC is the sum of the days it takes to sell your inventories (Inventory Days on Hand) and get back receivables (Days of Sales Outstanding) minus the days it takes to settle Payables (Days of Payables Outstanding).

Keeping accounting technicalities out, the logic is that if it takes lesser days to sell inventories and get back money owed to the business while it takes the firm more days to pay  suppliers, the shorter their CCC would be – which is a good thing since they can put that cash back to use.

In the same vein, it is worth mentioning that businesses must ensure they keep inventory manageable to avoid illiquidity during this period.

Secure supply chain

A major cash flow risk to businesses is the disruption to their supply chain which affects revenue-generation or leads to a spike in cost if the firms must replace suppliers at unfavorable terms.

Businesses need to secure their input supply by ensuring that if their suppliers are in distress already, they have mapped out alternatives to ensure their own operation is not jeopardized.

Factoring Government intervention

Businesses can also explore other financing options to inject more cash into their operations. Options like government grant or relief funds are often under-explored by businesses

Another option is for businesses to factor their account receivables. By selling account receivables to the third party (at a discount), businesses under severe cash constraints can relieve their pressures and work towards better cash management.


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