How To Manage Cash Flow During A Crisis Period?
The Indian economy was already going through a slowdown since February 2019. The arrival of Covid-19 as a typical ‘black swan’ only amplified it. The subsequent lockdowns and lack of demand further worsened the condition.
Large companies can ride such waves due to their strong financial standing. But it was and continues to be a challenging scenario for small businesses. In these dire straits, effective cash flow management can help companies survive and safeguard their interests.
Effective liquidity management is not a uniform concept, and it is different for every company. Nonetheless, some points are applicable across the board.
Read along to know more.
7 Cash Flow Management Tips
The importance of cash flow management during a pandemic or any other economic crisis cannot be overlooked. Thus, here are some pointers that can aid entrepreneurs to deal with these situations –
1. Managing Accounts Receivables
A monthly or quarterly review of the accounts will not be of any use in a crisis like this. Instead, it calls for a daily or weekly review of accounts receivables to check the areas from where earnings can be generated. There are different strategies to deal with it, such as –
Sending invoices following a delivery instead of a particular day of the month. It will help you streamline the revenue channel and fare better in a situation like this.
Contacting the client who still has due payments can be a solution as well. You can offer additional incentives to get payments on time.
Encouraging customers to make an advance deposit can also be effective. For instance, you can follow the examples of various car dealers who accept a booking amount and deliver the products later on time.
2. Update The Accounts Payable
Managing cash flow during crises is not limited to clinching earnings but managing payments as well. While you don’t want to ruin your relationship with a long-term supplier, you can delay or lower the amount payable to reduce outward cash flow. As a result, there’ll be less stress on the working capital.
An honest conversation and proper negotiations can always be fruitful as everyone struggles to keep their business afloat. In addition, you may get some leeway to manage the payable accounts better during a cash crunch.
3. Reduce Expenses
As every financial expert suggests, one should constantly scrutinise every penny they spend. This same suggestion can be helpful for organisations during a cash flow crisis. In the middle of a shortage, the priority should be minimising the expenses.
In this regard, curating a budget can be of great help. For example, a monthly estimation of expenses can help companies list areas where they can cut corners and decrease their expenditures.
4. Selling Non-Essential Assets
Alongside curbing the unfruitful expenses, you can also resort to the selling of non-essential assets. Often, companies invest in various assets that are not always vital to their day-to-day operations.
Off-loading such investments can benefit companies as they can churn in some cash to support their finances. It is one of the ways for small businesses to manage cash flow. Although a temporary fix, it can play a hand in saving an organisation from going bankrupt.
5. Controlling The Inventory
In a crisis mode, keeping a tab on the inventory is also mandatory. Updating it regularly can help you get an idea of supply and demand and understand which products are seeing lower sales.
Based on this analysis, you can also focus on modifying the manufacturing to increase revenue through in-demand products. Also, you can announce discounts and get rid of dead stock to recoup some of your investments back.
6. Focus On Leasing
Small businesses and start-ups are not always equipped with substantial working capital to manage economic downturns. Therefore, to keep their books balanced and finances healthy, they can opt for leasing instead of buying.
It will allow companies to keep their cash flow intact with small payments. Also, since it is a business expense, they can enjoy tax benefits as well.
7. Changing The Approach
A pandemic and resulting economic downturn have put almost every industry under pressure. However, searching for alternative revenue streams can be a good idea if you are feeling more of it.
For the time being, shifting to a more profitable and effective business strategy can help organisations ride this wave without any issue. In this regard, companies can opt for online business models or shift to selling associated products in demand to combat a drop in revenue.
These are some pointers to help entrepreneurs estimate the work necessary for surviving a cash flow crisis and find financial stability during these turbulent times.
What Else Can Help?
Apart from these pointers mentioned above, access to an easy financing solution like invoice discounting can also help. This is a purpose-built credit option for small businesses and start-ups.
Invoice discounting lets organisations utilise their unpaid but approved invoices to avail funds against their value. Usually, financiers provide a portion of the total invoice amount as a loan.
For example, if you have a total invoice amount of Rs.10 lakh, and a lender offers 85% of it as a loan, you will obtain up to Rs.8.5 lakh.
Herein, borrowers are responsible for collecting invoice payments and remitting the loan amount + finance cost to the lender.
Covid-19’s impact on the cash flow of businesses across the board has been noticeable. Although the second wave is not as urgent as the first one, it’s still managed to cripple demand across states. And with the third wave incoming, situations can get even dire. Therefore, companies must focus on taking necessary measures to reduce stress on their working capital.