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Howard Zangwill, CPA, Managing Director of Audit and Accounting in the Oakland office.
Howard ZangwillCPA / Managing Director of Audit and Accountingview bio

Cash Flow During Difficult Times

Cash flow analysis in progress

2/4/2021

There is no doubt that we are experiencing one of the most severe economic crises of the last 100 years due to the COVID-19 outbreak. We are starting to experience the impact of business closures, limited consumption of manufactured goods, very low levels of travel, uncertainty on how efficient our educational institutions will operate, but most concerning, a very unclear message from the financial world as to what the real outcome will be. No doubt however, it won’t be a pretty one. Although it may be too soon to understand the extend of the impact of COVID-19, we can all agree with certainty that it will probably be long lasting.
 
It does not matter the line of business a company is in; cash flow is and will be one of the most critical functions of the business. In fact, most business leaders and economist agree that cash flow is the lifeline of the business. While understanding what the balance sheet and income statement are communicating, analyzing the cash flow will tell you where you stand and whether the business can continue operating into the near future. Being able to anticipate the organization’s cash flow, allows for current and future planning of the business operations.
 
This article is not just about the importance of analyzing the cash flow statement as prepared by your accountant, and while it is a critical step, my objective is to highlight key questions that will help you determine your current cash flow situation as well as generating planning questions to ensure a solid cash position during a possible recession.  For example, having clear answers to the following questions is critical to strategize and prepare for maintaining a healthy cash position:

  • What is your current cash on hand, and how long will it last if money suddenly stops coming in?
  • What is your best estimate of cash inflow from estimated revenue during the next 12 months?
  • What (critical) capital improvements are anticipated over the next 12 months? Can they be delayed?
  • Is the company launching a new product requiring a strong marketing program that will require an increased cash outflow?
  • What are some opportunities for operating costs reductions in the next 12 years?
  • Can a labor force reduction take place without negative interruption of the company operations?
  • Can certain outside services be eliminated or reduced to improve the company’s cash position?
  • Are there opportunities to receive advanced payments from customers in exchange for reasonable discounts?
  • Can negotiations be made for opportunities with suppliers for better terms?
  • Is it possible to restructure existing debt to eliminate annual maintenance fees?
  • Do you have a strong banking relationship for additional debt issuance in case needed?

While the above questions focus on short term planning, it is critical that these observations be part of a strategy for surviving what may become a long-term struggle. Experts’ opinion on the economic impact of the pandemic indicate that it could be long lasting.
 
How can you improve cash flow? While the approach could be slightly different depending on the industry, the following is strongly recommended:

  • Review your cash flow statement once a month – as long as you track receipts and disbursements every day.
  • Know how much working capital you will need for the next one, three and five years.
  • Collect your receivables on time – Do collections planning and prepare a strong team to focus on collections.
  • Negotiate better terms for your payables – Very likely your suppliers are in the same boat and willing to negotiate as part of their collection’s efforts.
  • Inventory – work to increase inventory turnover. Inventory is cash sitting in your warehouse.
  • Compensation – for performance-based employees, pay after results, not before.
  • If layoffs are necessary, talk it over with your HR director and employment attorney to design a plan free of legal repercussions

While we understand that forecasting cash flow can be a difficult process, during the current economic environment caused by the pandemic this essential part of operating a business has become more critical and perhaps the most important aspect to ensure the survival of the company.
 
If your company is already in life support, make sure you have assembled a disaster planning team that should include an attorney, insurance agent, insurance expert, HR lead and an accountant.
 
RINA can assist you in projecting your cash flow by using the ProfiCents tool to experiment with “what if” scenarios given specific changes to your business activity and profitability. Please reach out to your RINA representative if you have any questions and need help with your cash flow projections.

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