Regardless of the state of the economy, optimizing your small business cash flow is crucial. Learn how to improve your cash flow in the time of COVID-19, and beyond.
For any small business, effective cash flow management is key to longevity and profitability. Unlike profit, which paints a picture of the general health of a company, cash flow projections show how much cash a small business has available at any given point. Knowing this is important, regardless of the state of the economy. However, cash flow analysis is a crucial tool that can help your business weather the rough waters of an economic downturn.
In such times, you should not only be focused on monitoring your cash flow, but also optimizing it. Here are eight steps you can implement today to improve your cash flow in the times of COVID-19.
Reduce Your Operational Expenses
In times when revenue may be decreasing, the first course of action is to reduce your expenses. This will, of course, look different for every small business. You could cancel equipment leases, adjust working hours for your employees based on current customer demand, or reduce orders with your suppliers. Other areas where you can reduce expenses include subscriptions, office supplies, and any independent contractors working on fixed retainers.
Negotiate with Suppliers
Now is also the time to take advantage of bulk prices and Covid-19 discounts. Ask your suppliers if they are running any promotions during the crisis. If not, take a look at bulk discounts. Not all small businesses can take advantage of these offers as they simply don’t need that many goods. However, you can still enjoy the discounted price by forming a buying cooperative with other small businesses that use the same suppliers.
Reexamine Your Offerings
Take a close, critical look at the profit margins on your products or services. Ask yourself, what products bring in only mediocre profits? What doesn’t sell as well as it should? This way of thinking can be applied to both products and services.
Profit margins on services can be harder to calculate than profit margins on products. Take a look at the number of hours a project or service takes to complete and compare it to the billable amount. This will give you a good idea of how profitable any given service is.
But what do you do with products that perform sub-par that you still have in stock? Consider putting them on sale. This will free up cash and improve your liquidity.
Offer Discounts to Clients
One way to boost your cash flow is to offer discounts to clients that pay before the due date. Yes, you may not be getting the full sum, but getting the cash earlier, especially if you operate on net 30 or net 60 payment terms, will improve your cash flow significantly.
Use Credit Cards
There’s never been a better time to use credit cards to increase your cash flow or to pay bills that are due before a payment is scheduled to come in. Paying your bills with a credit card, including traditionally cash-only expenses like commercial rent, can buy you some time and free up your cash in the short term. To avoid unnecessary fees, make sure to take advantage of the grace period.
Evaluate Your Prices
It may feel daunting to increase your prices in a time when people seem to be reducing their spending, and it goes without saying that you shouldn’t increase prices without reason. However, if you’re truly not charging enough for your products or services, your small business stands to lose a lot.
Apply for Funding
Business loans are another good way to improve your cash flow. Right now, there are two funding programs that are dedicated to helping small businesses get through the COVID-19 situation: the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL).
You can use these loans to pay expenses such as payroll, rent, operating expenses, etc. The PPP loan can also be 100% forgiven if you adhere to specific rules in the eight-week period following the date of receiving the loan.
Conduct Frequent Cash Flow Analysis
To determine if any of your efforts are producing results, it’s important to analyze your cash flow frequently. A monthly cash flow forecast is adequate, but a bi-monthly or weekly forecast will help you account for rapid changes connected to the COVID-19 situation. For the forecast to be valuable, you need to base it on real numbers that accurately reflect your income, payroll, production, etc.
In addition to cash flow analysis, you can construct different cash flow scenarios to see how increases in your expenses or decreases in your income will affect your runway. In times of uncertainty, it can be difficult to know how your business will be affected. Our advice is to look at several worst-case scenarios and be prepared for them.
Cash flow forecasting is much easier with intuitive cash flow management software that can import information about your income and expenses automatically. These tools allow you to customize different “what-if” scenarios to help you visualize any big changes in your business.
Try FINSYNC free for a week to see how the platform can help you get a better sense of your current financial situation.