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It goes without saying that the COVID-19 pandemic is affecting millions of businesses across the world, causing stress and strain on businesses like we have never seen before.
Although this is certainly a difficult storm for businesses to weather, this is not the first nor will it be the last crisis that will affect the small business owner.
The best way to navigate any crisis is to be fully prepared, but that’s almost impossible, so the best thing businesses can do to be prepared is to understand and forecast your cash flow on an ongoing and scheduled basis.
The review of financials by most businesses is done on a monthly basis. Although this is an important step, relying solely on monthly financial statements to drive or inform business decisions can result in missed opportunities and a delay the response times to any cash challenges.
To combat this, and particularly to help the small business owner weather the storm, we recommend implementing a weekly cash flow process or at a minimum, monthly.
The weekly process includes 3 components: (1) reviewing what happened (the past), (2) where we are today (the present) and (3) where we are going (the future). Whether you find yourself in crisis mode or not, this guide will help you get started with developing your Baseline Forecast and introduce scenario planning to make better decisions.
Having a system in place to focus on cash flow – both where you have been (monitoring) and where you are going (forecasting) will put your company in the best position to survive and thrive, regardless of the present circumstances.
Cash flow is like oxygen to a business, without it the small business will suffocate and die.
A business needs the right amount, at the right intervals, to maintain good business health. Too little and a business may survive, but it will be in a weakened state. This can make it difficult to survive an economic downturn or fend off competitors. Too much and a business may become “lightheaded”. This can cause poor decisions and swing the pendulum the other way, suddenly the business finds itself suffocating and gasping for the cash air needed.
“Do we have enough money? Can we afford it?” Is often times the questions asked by Entrepreneurs & small business owners. Why are these questions asked?
In today’s age, you can log into your bank account in seconds using your smartphone and know exactly how much cash you have available. Why isn’t that enough? The short answer may surprise you: your current cash balance is only one piece of the puzzle.
Just imagine driving your car without a windshield or a rearview mirror, just windows on the left and right. You could see where you are at that given moment by looking side-to-side, but not where you came from or where you are going. You wouldn’t know if you were inches away from an accident or if a broken bridge lies ahead. Pretty scary right? Sometimes, ignorance is bliss. But this does not apply to cash flow or in this instance driving your car.
In today’s world, monitoring and forecasting your small business cash flow is as critical as having a business bank account.
Without monitoring and continually projecting future cash balances, you’ll simply be using your bank balance as a marker at that given moment, that is, our side windows. When we monitor our historical cash flow, we have a clear view of what happened and where we came from, our rearview mirrors.
And the small business owner can go one step further, with cash flow forecasting, they have visibility into what is coming so they can make decisions and plan ahead, their windshield.
The COVID-19 pandemic is affecting millions of businesses across the world, causing stress and strain on individuals, companies, entire industries, and even national economies. Although this is proving to be a particularly difficult storm for businesses to weather, this is not the first nor will it be the last crisis that will affect your small business. Monitoring and forecasting cash flow is as critical to a business as having a bank account.
A crisis can take many forms. It can be company specific such as losing a large client or supplier relationship, industry specific in the form of shifts in technology or processes used or it can affect a whole economy in the form of a recession.
As businesses struggle to deal with the COVID-19 crisis, the common cash flow questions during normal times, “Do we have enough money? Can we afford it?” are followed by more difficult ones. These questions challenge the very survival of a business and the livelihood of its owners and employees.
“Do I need to lay people off? How long will the cash we have today last? Are we going to go out of business?”
Small business owners hate uncertainty and neither do they like surprises. This is especially true when it comes to cash balances, availability of cash, and certainly the ultimate survival of a business.
How do you know if you’re headed towards a potential cash flow crisis? Here are a few symptoms you may experience:
If there is a good process in place for monitoring and forecasting cash, you can immediately start weighing options and strategizing for how to navigate the crisis. You can outline different scenarios and what-ifs to map out your options and possibilities. Most importantly, you can start on the fly from a position of confidence.
If you do not have a process for monitoring and forecasting cash flow, this is often referred to as starting “behind the eight ball”. Meaning, the race has already begun, and you are not yet at the starting gate.
Critical time must be spent gathering information to figure out not only where we are today, but a reasonable expectation for the future, that is your ‘Baseline Forecast’.
If you start from scratch, it could take days to gather enough information from your accounting software, bank registers, sales forecasts, debt schedules and more to be ready to sit down and try to interpret the information.
And gathering all that data is just the first step, you will still need to analyze and assemble it in order to develop a plan and forecast in order to take actionable steps.
In a crisis, fast decisions can be the difference between survival and all kinds of unpleasant alternatives.
What about… When things return to ‘Normal’? 
Even when there isn’t a crisis like the COVID-19 pandemic, small businesses have historically struggled with managing their cash flow position. According to Intuit’s ‘State of Small Business Cash Flow’ report, 61% of small businesses regularly struggle with cash flow and 69% of their owners have been kept up at night by cash flow concerns.
Without a doubt, cash is very critical to business survival and most business owners identify cash flow as a source of worry, its struggle that causes them stress, then why don’t they focus on managing it more often?
The simple answer is that the traditional financial statements, that is, the income statement, balance sheet and cash flow statement provided to the small business owners by their accountants can be difficult to interpret and don’t tell the whole cash flow story.
Surprisingly even the cash flow statement, which based solely by name you would think would help, does little more than tell us the major categories where cash was spent, but tells us nothing about the future.
This is amplified by the fact that financial statements are prepared and reviewed monthly.
Reviewing your numbers monthly works for measuring performance against budgets and benchmarks, but you can lose sight of important activity and miss out on opportunities if you rely solely on monthly financial statements.
Let’s look at a simple example of insights and opportunities that are lost on the collections, accounts receivable side by only looking at information on a monthly basis.
The invoice is now 30 days older and more difficult to collect. Worse, when the business owner calls, they learn the customer has cash flow problems and are now unable to pay. What now? A once thought-to-be profitable job just became a huge expense and cash flow headache. Had the missed payment been noted during the June 19 weekly cash flow meeting, the business may have been able take action to reduce the impact. But now, facing the full brunt of this situation at once, the business has fewer options.
It is important for the small business owner to note that a lack of focus on cash can actually create a cash flow crisis!
If the business had a weekly or bi-weekly process in place to review cash activity and update their cash flow forecast, the payment delay would have been caught much earlier and they would have been able to take action sooner.
User | 22/08/2020