Cash Management in a Crisis

Whether you're operating in crisis mode or not, cash liquidity management is of the utmost importance to your company at all times. If a company doesn't have the ability to determine the right amount of cash it needs to pay its debts, at the right time, it will eventually run out of cash and go bust irrespective of how profitable it may be.

There are many approaches you can adopt to manage your cash management needs more tightly in a crisis. This article considers some of the more practical steps you can take right now, to ensure that your business doesn't run out of cash over the next six to twelve months.

Cash Forecasting Techniques

You need to determine the amount of cash you'll need to operate your business, by preparing cash forecasts. Bear in mind that the approach and techniques you use to develop your cash forecasts must be relevant for your business, considering the specific operating requirements for your organisation.

At a very basic level, a good cash forecasting process involves the following five steps:

1. Identify the relevant sources of information to use, e.g., historic cash flows, cash flow projections, and budgets.
2. Identify your cash inflows and outflows and categorise them by cash receipts and payments.
3. Assign a degree of certainty to each cash inflow and outflow.
4. Conduct a reasonableness check of the cash forecast.
5. Choose the right cash forecast time horizon(s) and techniques for your business.

You need to determine the amount of cash you'll need to operate your business

Cash forecast time horizons can be as immediate as a daily forecast or projected over multiple years. The most common cash forecasts used are daily, weekly, monthly, and quarterly. A retail outlet that has just re-opened following the COVID-19 lockdown is most likely to use a daily forecast and project its cash inflows and outflows out over the next 28 days.

A common cash forecast to use is a weekly cash forecast over a 13-week period. Again, this is quite a common cash forecast and time horizon to use in the retail sector. A weekly or monthly forecast is also quite useful to use when applying for a bank loan. Whether you're a retailer or a services-based company, you should take the time to decide which cash forecast time horizon or combination of time horizons best suits your business model.

In line with the cash forecasting process described above, the receipts and disbursements cash forecasting model is arguably the most practical cash forecasting technique to use in a small business. It categorises the cash forecast into cash receipts, cash payments, and records the opening cash, movement in cash flows, and closing cash over the time horizon used.

Cash Management and the Operating Cycle

The relationship between the operating cycle and the cash flow cycle can often be overlooked when considering cash management processes and procedures. If we take the example of a manufacturing company, it buys raw materials today (day 0) and straight away has an account payable to the supplier that is due to be paid (day 30). An order is placed on day 30 by a customer and it takes us another 15 days to make the finished product (day 45). We ship the product to our customer with invoice to be paid to us in the next 30 days (day 75).

Actively monitor and improve the efficiency of your working capital cycle

In the manufacturing example, we will be waiting up to 75 days to receive cash back on the money spent purchasing raw materials. Any delays in the operating cycle can extend this lead time even further beyond the already long 75-day operating cycle, e.g., production delays by us, transport delays, payment delays by our customer or processing delays by the bank. That is why is extremely important to understand the relationship between working capital management and your operating cycle, and how to make it as efficient as possible.

Short-term Borrowing

If you've any uncertainties with regard to your ability to support your cash requirements, it'll be smart of you to make use of any short-term borrowing products available for your business. The resulting cash influx could make the difference between ultimate survival or failure.

Understand the short-term borrowing products available...and their pros and cons

Some of the widely known short-term borrowing products available to SMEs are:

• Bank overdrafts.
• Revolving credits.
• Term loans.
• Letters of credit.
• Invoice discounting/ factoring.

It is important to assess the pros and cons of these products. For example, some are available on demand but come with higher rates of interest. Others are designed to support your working capital needs, but may include facility and commitment fees.

Take the time to choose the lending product that best matches your liquidity and funding requirements.

Free up Trapped Cash

It's also quite likely that you have cash tied up in the business, e.g., as inventory, which you could choose to use/ dispose of in order to enhance your liquidity and lessen your dependency on short-term borrowings.

Free up trapped cash, and bring it back into your bank account

Some practical ways of freeing up trapped cash in a crisis may include:

• Disposing of old assets that you no longer use or intend to use in the business.
• Discount-selling last season's stock through an online platform such as Amazon or Shopify.
• Offering customers early payment discounts.
• Negotiating better terms with your suppliers.
• Using invoice discounting, factoring or other working capital finance products.

Recap

The above items are a brief look at the cash management options available to you in a crisis.

Here is a quick recap:

• Liquidity management is vitally important to the solvency of any business.
• Carefully choose the cash forecasting time horizons that best suit your business.
• Use the cash forecasting technique that best matches your purpose, e.g., seeking loan finance.
• Operating cycle and working capital management cycles should be analysed in tandem.
• Actively monitor and improve the efficiency of your working capital cycle.
• Understand the short-term borrowing products available to your business, and their pros and cons.
• Know how to identify and free up trapped cash, and bring it back into your bank account.

Hopefully, these practical tips will help you to improve your cash management approach from hereon, especially during this time when many of our businesses are being negatively impacted by the COVID-19 crisis.

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