11% — that’s the percentage of large companies that are expected to run out of cash if sales continue to fall in 2020 as per one estimate*. And this number will only grow as the year progresses. The COVID-19 pandemic has battered the global economy and is bringing even large players down to their knees. How do you make sure that your organization does not succumb to the economic crisis and stays afloat?
Cash flow management in uncertain times will require careful and strategic planning, with a focus on overall business risk management and continuity. With sales figures dipping, the finance managers will need to play a larger role in this than their sales peers. The finance team needs to ensure there is always enough liquidity available to meet the enterprise’s payment obligations. Here are key focus areas for finance managers to smartly manage cash flow:
- Re-evaluate your budgets: Budgets planned for 2020 need strict revision. Similarly, expected sales numbers need to be relooked at, and the relevant stakeholders must be prepared to deal with different and difficult scenarios.
- Actively manage accounts receivables: In times of growth, with cash flows from new sales pouring in, accounts receivables are usually not given much focus. But during a crisis, receivables gain a lot of importance. Keep track of the amounts customers owe you and when they’re due for collection, ensuring that you can anticipate a non-payment situation. You could even offer discounts for early payment. Stay on top of how your customers are performing so that you can plan and prepare for scenarios where customers are unable to pay back.
- Set priorities right: Ranking and categorizing payables is one of the first steps to take when managing cash flow. Hold onto cash for as long as possible, while ensuring that you don’t irk your suppliers and partners and damage relationships over non-payment. You may want to make as many of your payments on time as possible, but if cash flow is challenging, prioritizing them can help you stretch your budget a little further. It is also a good time to reach out to your vendors and suppliers to try and renegotiate the terms for your payments, and ask for discounts and/ or revised rates.
- Managing with less inventory: Now is not the time to buy too much inventory and tie up your cash. See if it is possible to carry less inventory and only order inventory when it’s absolutely needed. It is also not a bad idea to liquidate any unnecessary inventory and get back some of that cash, even if it means selling at a discount. The objective is to find a balance between keeping a minimum stock value and maintaining your business activity.
Although cash flow plans are not glimpses into the future, preparing in advance especially when the ground is shaky, can help you prevent troubles before they hit you. Stay on top of your cash flow and take small but smart steps to keep your business on track.
Senior Manager, Analytics Translation and Solution Design, LTI
Aditya is a seasoned Finance executive with experience in Banking and Financial Services spanning corporate, project finance, retail and corporate banking. He is responsible for leading efforts to develop LTI-Leni’s Finance pedigree- the cognitive AI based solution for today’s finance managers as part of LTI’s Data Science practice.