MANAGING CASHFLOW IN TIMES OF UNCERTAINTY

4-STEP ACTION PLAN

Here’s a tried-and-true process that can help identify a potential cash crunch and maximize decision making.

STEP 1: FOCUS CON CASH FLOW

AS OPPOSED TO NET INCOME

Just as it is possible for unprofitable companies to generate positive cash flow, it is possible for profitable companies to face cash shortfalls. If you are used to seeing your numbers based on your Profit and Loss report, now is the time to focus on liquidity by examining your short-term cash flow. Profitability becomes irrelevant if you run out of cash.

STEP 2: PUT TOGETHER

A 13-WEEK

CASH FLOW PROJECTION

A 13-week cash flow projection (or one calendar quarter) allows you and your managers to pinpoint the major short-term sources and needs of company cash. Furthermore, you want to identify the relative size and timing of potential cash shortfalls. A quarterly cash flow is simply “cash in, cash out,”similar to your personal checkbook register. It’s going back to the basics.                              

To gain a better understanding of your company’s cash flow picture, see the example below:

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• Assemble a series of actual weekly cash flows to identify patterns and trends;

• Identify and forecast the total cash sources throughout the 13-week period, like collections of existing receivables and cash receipts from subsequent sales;

• Establish you relevant cash disbursement line items such as payroll, payroll taxes, employee benefits, vendor payments, insurance, rent, professional fees, other tax payments, and any other contractual obligations;

STEP 3: ANALYZE THE OUTCOME OF THIS

Tracking actual weekly cash flow activity compared to a projection, especially during out-of-the-ordinary circumstances, will allow you to see when and where you need to make decisions.  

HOT TIP: Having a 13-week out cash flow can help expedite crucial communications within your company or with your lender, creditors, investors, and external advisors. It can also aid in negotiations with your vendors.

STEP 4: MAKE DECISIONS:

WHAT TO DO IF THERE IS A CASH SHORTFALL?

If the gap is moderate, consider these ways to increase short-term liquidity:

• Offer a discount to customers for accelerated payments;

• Prioritize payments to critical vendors;

• Request temporary rent abatement from your landlord;

• Evaluate lending programs or alternative financing;

• Defer capital expenditures, especially if they do not serve your core mission.

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