How to use cash flow planning now to make good strategic decisions that will impact your future
Here’s a true story, a real-world example, from the last recession:
When the big recession hit in 2008, companies with business plans and good business planning process were able to adjust to the drop much more quickly than their competition. Sales dropped suddenly. The companies with a good planning process turned to their plans and quickly adjusted costs, expenses, marketing, and so forth to deal with the change. The ones without good planning had to dig into their business details during the crisis to develop and understand the connections. With planning, the connections are already there, so you adjust them.
If you already have a budget and a forecast for your business that helps you predict your cash flow, now is the time to dig in and create different scenarios to help you understand how changes in sales will impact your cash.
If you don’t currently have a forecast, that’s OK. Now is the perfect time to create one and put it to work.
With your forecast in hand, you can anticipate how far things will fall, and identify the best ways to react:
- Figure out your burn rate and runway: How quickly are you using up your cash reserves and how long do you have before you run out of cash?
- Review marketing programs: Are there marketing programs that you should cut or reduce?
- Review payroll: For most businesses, payroll is the biggest cost. With your revised forecast, take a look at how changes in payroll could keep you afloat. You have options:
- Freeze hiring
- Cut all salaries by 20%
- Cut leadership salaries
- Review all discretionary spending: From office supplies to employee perks and meals, take a close look at every expense and see what you can cut moving forward.
The benefit of having a plan is that you can quickly adjust your sales forecast, adjust your expense budget and see what impact that’s going to have on your cash flow moving forward. A cash flow forecast will highlight your trouble spots in advance so you have time to react and come up with solutions.
Plan for the future and know that the crisis will not last forever
Every small business owner is currently experiencing the negative effects caused by the coronavirus. While this is both a health and economic crisis, just know that it will not be forever and that we’re all in this together. No one wants to see businesses fail, people out of work or struggling to make payments, and there’s a good chance you’ll find support amongst your customers and vendors.
I still remember vividly when I hit a wall with my own business and had to go to my vendors and tell them my payments would be made more slowly. I learned then that information and transparency can be the most effective method for surviving a crisis. Sure, they’d rather have your money but hearing from you, with explanations and promises, is an order of magnitude better than silence. And by reviewing your financial statements now and forecasting potential scenarios, you can also go to them with a plan of action.
If you need your customers to pay faster, brace yourself, everything is tightening up and they’re likely in a similar situation. Talk to customers, change the terms, offer discounts, protect your long-term relationships with them.
Lastly, consider that it may be time to look for extra working capital. Keep your eyes open for government measures to help small business and business owners, and talk to your favorite banks too. Don’t give up or panic, there are plenty of opportunities to not just survive this crisis but emerge with a stronger business than before.