Dealing with a disruption in cash flow
While a disruption in cash flow can happen for many reasons in the best of times, the economic consequences of this coronavirus pandemic have certainly proven that life is not “business as usual” for almost everyone all at the same time.
As a bank that has been around for more than a century, we’ve been through difficult times before and can offer some tips for navigating what is likely new territory for your business.
While it is more important than ever to keep the lines of communication open with your financial partners in order to discuss your specific concerns, consider the ideas below as a starting point for safeguarding your cash flow and securing your organization’s financial position.
Steps to micromanage your cash flow
The time has come to examine every aspect of your budget and micromanage your cash flow and supply chain. While a big-picture perspective is usually important to maintain, right now the focus should also include short-term options that don’t cause long-term headaches.
Step 1: Take out your budget and revisit projections. You may not be able to control your reduction in income, but you may have the ability to adjust your expenses to fit your current circumstances. Figure out your new income projections so you know your target for cutting expenses. It’s time to focus on necessities. Determine what monthly expenses you can eliminate, at least for a short time.
Step 2: Identify your biggest expenses that can’t be eliminated. For most businesses, your largest expenses will be debt obligations (loans) and vendor contracts required to continue operating. What is your ability to meet those obligations? You may have to have hard conversations to determine if a payment plan would be more realistic or if terms can be extended. I recommend talking directly to your lender about payment options. While most banks are waiting for guidance from the government on state and federal programs currently being developed before making blanket policy announcements, we are more than willing to have one-on-one discussions about individual situations.
Step 3: Evaluate your income streams. In a situation like this, your immediate goal is to get paid as quickly as possible. Since other businesses (and retail customers) are also feeling the pinch, it’s important to be creative in finding win-win situations for anyone who might have difficulty paying you, as well. Here are some ideas that could help:
- Discounts or incentives. Could you offer a 1-2 percent discount on invoices paid within 15 days (or 30 days — whatever makes sense in your industry)? People might be open to any savings on inevitable expenses.
- Payment plans. Rather than waiting three months for a lump sum payment at the end of a job, are there opportunities to institute incremental payments to enjoy a small infusion of cash throughout the job?
- Credit cards. Now might be the time to start accepting credit card payments. You can get paid right away, but the credit card user can extend their payment to the end of the month (or beyond). Plus, they may get a reward for using their credit card. It’s quick and easy to get set up for credit card payments.
- Electronic payments/ACH. Make it as easy as possible for your business customers to pay by setting up automated clearing house (ACH) payments. These electronic payments are especially nice for recurring payments and can offer additional speed and security over checks. Many banks have increased fraud services tied to epayments. Also, funds usually appear in your account the same day or the next day versus waiting for the mail to arrive and then depositing that money yourself.
Step 4: Get creative about existing inventory. Look at your current inventory and consider ways you can use what you have. Do you have raw materials you could use up during a disruption in your supply chain? Is there stagnant inventory you could try to move using discounts or special offers? Could you work cooperatively with another business where you each contribute different pieces of the puzzle? Are there other options for sourcing necessary supplies?
Step 5: Consider all options for cash reserves. After adjusting your expectations and projections, you may still need to dig into reserves to get over a short-term hump. Determine all your options for dipping into cash and prioritize what should get used in which order. Having a plan will help you understand how long you can last in the worst-case scenario. This is a good step to involve your banker and/or lender. Some options to explore include:
- A loan;
- A line of credit;
- Treasury management services at your bank;
- Selling unused assets;
- Government relief and/or stimulus programs; or
- Small Business Administration assistance.
Regardless of your industry — even if your business is considered essential — things will be different for everyone for a while. Somewhere along the chain of customers, a business or individual won’t be able to pay you or one of your customers in the usual way and the effects will trickle down to you.
Make adjustments sooner than later in order to weather this disruption in cash flow with minimal impact on your business’ financial health.
Jeff Ellestad is a treasury management officer at State Bank of Cross Plains, where he works one on one with businesses to find financial solutions that maximize working capital, manage or extend payables, and protect your accounts by reducing risk.
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