When navigating business shocks like the Coronavirus Crisis all business owners and leaders need to focus on the “4Cs” of your financial fundamentals: Cash, Customers and Commitments, all culminating in your Cash Flow Forecasting.
Cash is King
- How much cash do you have now in your bank accounts ?
- Are your bank reconciliations up to date ?
- How quickly can you collect your trade debtors (without disrupting strategic customer relationships), and how will change your cash flow forecasting assumptions ?
- What reserves can you call on and when / how, eg overdraft facilities, funds on deposit ?
- Deduct business credit card balances – they are “negative cash”, even if they aren’t due to be paid off just yet.
Stay Close to Customers
- How safe are your “confirmed” orders and pipeline ?
- What are your cancellation and “force majeure” rights and obligations in your Terms of Business ? Consider separating the collection of cancellation fees and regular billings in your cash flow forecasting model.
- How can you communicate with them in a way that gathers facts about their plans and tells them what you are doing to work through this crisis, without alarming them and even triggering cancellations ?
- Might customers with limited financial reserves quickly become bad debt risks ?
Know Your Commitments
- Can you fulfill your customer orders (assuming that its in your interests to do so) ?
- How quickly do you have to pay off your trade creditors, and are your cash flow forecasting assumptions still realistic ?
- If business drops away, can you run off casual / contracted labour ?
- Can you ask your permanent staff to take unpaid leave, or even invoke “stand down” provisions ?
- If you need to make staff redundant, how much would you need to pay out and when ?
- Are you a small employer under the Fair Work Act, and how might those provisions give you relief ?
- Do you have any penalty clauses in your customer contracts ?
- Can you scale back orders already placed with suppliers, if necessary ?
- Do you have related party payments that you can suspend or cancel ?
- Are you currently up to date with your ATO and State Revenue payments (GST, PAYG, Payroll Tax etc), in case you need to negotiate a delayed payment plan in the future ?
Weekly Cash Flow Forecasts – Your #1 Business Crisis Tool
- If you don’t have a “week by week” cash flow forecasting tool in place, now is the time to set one up.
- Start by quantifying your fixed vs discretionary cash outflows and your likely customer receipts – you may want to allow a risk percentage for further order cancellations.
- If your business is unable to trade, you can figure out how many weeks you can stay in business by dividing your working capital (cash + collectible trade debtors – trade creditors) by your fixed weekly cash outflows.
- If you need to extend your “weeks in business” calculation, think about how you can reduce permanent staff costs or reduce non-essential expenditure temporarily.
- If you need help putting your crisis cash flow forecasting in place, ask your accountant or an expert like the Advisory Collective to help you – you will understand your business like never before once you have this tool in place.
