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Tax & Assurance Guidance

COVID-19 Cash Flow Planning

Posted on July 20, 2020 by

Jim Biehl

Jim Biehl

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The COVID-19 pandemic caught many businesses by surprise. Beyond just health concerns, the combination of forced business closures, stay-at home-orders, and general fear about transmission created an unforeseen economic situation. As revenues dropped businesses had to make hard decisions about payroll costs and assess whether employees would be terminated, furloughed, or transitioned to fewer work hours. Concurrently, Congress implemented several loan programs such as the Paycheck Protection Program (PPP), Economic Injury Disaster Loans (EIDL), and more to make needed funding available. Just as states are starting to re-open and focus transitions from survival to recovery, news of sharp increases in COVID-19 cases have been reported. While it is unknown whether previous containment rules will again be implemented, the news does highlight the need for businesses to be prepared for what the future holds. An essential component of this process is cash flow planning. Not only should businesses focus on the traditional 13-week timeframe, but also look at longer periods as well. To help clients, prospects, and others, Clayton McKervey has provided a summary of key planning considerations below.

  • Accounts Receivables – Reducing the time it takes to receive payment is critical to maintaining healthy cash flow. Spend time reviewing receivables reports on a weekly basis to understand how long invoices have been unpaid. This will provide essential information to management and allow for quick decisions about specific customers or broader policy changes that can have a positive result. Consider the following items when reviewing accounts receivable.
    • Upfront Deposits – Many businesses only invoice once the project is completed or order is fulfilled. While this may make things easier for the customer it has a reverse effect on the business. Consider asking customers, especially new ones, for an initial deposit, and then bill the balance upon completion as it will provide access to needed cash.
    • Invoice Timing – Many businesses will send invoices on a specific date, usually at the end of every month. Consider submitting invoices immediately upon the delivery of products, supplies, or services. This will help to reduce the time between delivery and payment.
    • Progressive Invoicing – Some businesses may want to consider generating an invoice every two weeks to cover services delivered. While this may be a difficult change for long-standing customers, it should be easy for new ones.
    • Payment Options – Consider offering customers a small discount off the invoice for early payments. When it makes sense, this can be an effective method for generating income much more quickly.
  • Cut Expenses – While many have already been forced to cut expenses things will change as the recovery continues. Unlike the survival phase where businesses were making immediate cuts, the recovery is different. Reconsider the expenses which need to be cut to accelerate the recovery plan. Given the reported increases in COVID-19 cases, it is possible more closures and disruptions are on the horizon. Proper expense management will ensure businesses are on solid financial ground.
  • Negotiate Payables – Extending the amount of time available to pay vendor invoices will help to reduce the strain on working capital. Discuss the possibility of discounts or extended payment terms. While not all will be able to make such concessions, it is likely there are key partners who will. Although sometimes uncomfortable these discussions can lead to a meaningful outcome.
  • Business Line of Credit – If the business does not already have a line of credit arranged with a bank or other lender, then now is the time to do so. Although it may be challenging to secure large lines of credit, they are an important tool in fighting cash flow shortages. Consult with your business bank to determine the available opportunities and required documentation.
  • Asset Management – If there are unused or dated equipment, tools, or machinery the business is no longer using for production, then it makes little sense to keep them around. Consider selling these assets to generate additional cash flow for the business.
  • Lease v Buy Decisions – During the recovery, many businesses who have made it a practice to purchase equipment rather than leasing it, may want to consider reevaluating these decisions. When cash is tight leasing offers the opportunity to have access to the latest technology or equipment without the drain on cash resources. Carefully review recovery plans to determine the best approach to these important decisions.

In Perspective

Cash flow planning is not only a valuable exercise especially when transitioning from survival to recovery, but it is also necessary to satisfy banks and other lenders that have issued loans or lines of credit. Although banks have offered some flexibility over the past few months, it is critical to demonstrate how quickly the business can return to pre-COVID-19 levels. A crucial part of this includes a short- and long-term cash flow plan that highlights when and how the business will be impacted throughout recovery. Failing to provide such information to lenders may jeopardize available credit at a time when businesses need it most.

Contact Us

Developing a robust cash flow plan can help businesses formulate a recovery plan and timetable. It can also serve as a benchmark for measuring ongoing progress. Regardless of your current situation, the value of cash flow planning and projections can not be understated. If you have questions about the information outlined above or need a cash flow confidence assessment, Clayton & McKervey can help! For additional information call us at 248-208-8860 or click here to contact us. We look forward to speaking with you soon.

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Jim Biehl

Shareholder, Manufacturing & Distribution

Leading the firm’s manufacturing & distribution group, Jim has built a reputation for providing strategic tax, accounting and operational support to owners.

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