The coronavirus pandemic has abruptly sent the American economy — along with nearly every other country’s economy — into a tailspin. After years of steady growth, businesses of all sizes are now facing an incredibly difficult moment.
It’s a concerning time, but the challenges brought on by COVID-19 also present an opportunity for many companies to explore a reset, or a review of the financial dynamics of their business.
For our clients, one aspect, in particular, we are stressing right now is managing cash flow. How much money is flowing into and out of your business? The money you’re able to collect right now, or future revenue prospects, may have changed recently. When you understand this important financial metric it will help you better navigate the uncertain economic terrain we’re currently experiencing. It’s also vital information to have in order to create a plan to weather the storm.
Our firm, thanks to decades of experience, is ready to help guide you through the challenges facing your business. And at this time, cash flow is imperative, so let’s quickly review a few key points about cash flow you should keep in mind.
Assess Your Cash Situation
Each company is different, but the first thing every company should be doing is making an assessment of how much cash on hand they have, along with the type of credit available to their business.
While loans are an option — the federal government just earmarked nearly $350 billion to help small businesses — accounting for the health of your business is where all companies should begin their COVID-19 response. And taking account of your cash flow situation is a great place to start.
The challenge many businesses are facing right now is diminishing sales. As sales drop, cash inflow dries up with it. This puts an emphasis on managing cash outflows, including salaries, merchandise, interest, rent, and supplies, among other outflows. If outflows remain the same as cash inflow decreases, cash reserves will eventually become a major issue. This is why it’s important to take a comprehensive review of your expenses during this downturn.
Review Your Expenses
It’s an old adage for business owners: no sales without costs.
And what we’ve found, through decades of helping clients, is that 80% of business costs are dedicated to 20% of vendors. This makes it important to identify the less-essential costs that are associated with a majority of a company’s vendors and decide which can be trimmed.
Here is a great place to start with areas you can review when looking for non-essential costs to cut:
- Start by reviewing subscription services. These tend to be small costs that add up over time. Do you really need a subscription to a certain trade magazine?
- Can you downgrade your cable or internet service?
- Are there phone lines you can cut?
- Review all recurring costs, and find which are dispensable when business slows down.
We understand not all small businesses keep good records, and this is an opportunity to locate, assess and record these expenses.
Should I Trim Payroll?
This is a difficult and frequent question businesses run into when looking to manage their cash flow.
MISSION Accounting advises cutting payroll and laying off employees as a last resort measure.
Here’s why: The current lockdown period most businesses are dealing with is still expected to last only a few months. And when your business opens back up, you will need your employees there alongside you. Some companies are looking to lay off or furlough their employees during this time, but that could ultimately be penny wise and pound foolish. Your business runs the risk of key employees not returning once your business resumes, feeling they were abandoned when they needed their paychecks most.
This will then force your business to seek out new employees, which can be costly, along with the investment that goes into training your new workers. Conversely, by finding a way to keep your employees in the fold, they are likely to return galvanized — and without the need to be trained on how your business operates.
Instead of laying off employees, a more feasible option is to keep employees in some capacity, even if it’s on a reduced schedule or at a reduced wage or salary.
The recent stimulus plan includes a Paycheck Protection Program that is aimed at businesses that need cash to keep their employees on the payroll. We’ve recently written about this program and other SBA loans that may help businesses stay afloat during this time.
Are There Large Expenses, Like Rent, That Can Be Cut?
Cutting large expenses is where businesses can make the biggest impact on trimming costs.
Using QuickBooks or a company’s accounting records, MISSION Accounting looks at all vendors for our clients, typically for the past 12 months. We then figure out how much companies are spending on each vendor and supplier. Major costs that are not boosting sales in the short-term become candidates for reduction or cutting altogether.
Many times, we find that rent is one of the large items that can be trimmed. We recommend our clients talk to their landlords about adjusting their rent payments or deferring payments to later months. Be frank: tell your landlords that business has been temporarily constricted by these unique circumstances. You can offer to make a payment that’s half of your usual rent payment, and landlords will often be open to this arrangement; some payment is better than no payment, after all. On your end, this is a more efficient way of saving on expenses than haggling with your internet provider to reduce your service by $10 a month. And at the same time, this allows your business to at least temporarily cut costs.
This should provide a foundation for your business to cut costs and help manage cash flow during the COVID-19 outbreak. But understandably, there are a lot for business owners to manage right now. If you need help either getting your books in order or a dedicated team that has years of experience offering financial solutions, please reach out to MISSION Accounting today. We can help you prioritize your next steps, identify areas to improve cash flow, and help you create a plan to take you through the next few months, and hopefully years.