How to Survive in Unprecedented Times

We are living in unprecedented times right now. Many aspects of our lives are drastically changed, businesses are facing difficult decisions of preserving and prioritizing cash flows and maintaining a level of workforce to continue to meet customers demands. Therefore, having a good pulse on your cash flows requirement is extremely important, especially during the current crisis. Let’s take a look at what a cash flows projection entails and how it can help business owners see the reality and forge a logical path forward.

Traditional accrual basis income statement are often unhelpful when it comes to cash flows management. It can especially be misleading during a crisis. The concept of a cash flows projection is relatively simple… tallying all your sources of cash and uses of cash during the period of the analysis. The nuances of how to build a cash flows projection is more complicated. It requires looking at your customers and suppliers and your relationships with them. A well crafted cash flows projection will provide a road map for running business while it becomes a critical tool in managing cash flows during unprecedented times like this.

At the beginning of the projection, business owner will need to consider making certain assumptions. For example, when will we receive payments from our larger customers? What payment terms do we have with our essential vendors? Will our relationships with our customers and vendors allow us to accelerate receipts and defer payments in difficult times, such as the current COVID-19 pandemic? Answering these questions will have a drastic impact on the timing of the cash flows.

During the current COVID-19 crisis, business owner should also consider whether there is any government stimulus financial assistance available that should be factored into the cash flows projection. On the other hand, any restricted use of the assistance should also be included in the projection. If the financial assistance is in the form of a loan, business owner should also consider the timing of the principle and interest payments in the projection.

In addition, small and medium size businesses has been depending on using credit cards to pay certain expenses in order to defer cash flows. This practice will have an impact on cash outflows and should be considered when crafting a cash flows projection.

A cash flows projection is a tool that sets the foundation and the basis for reviewing the assumptions made. Business owner should use this tool to compare to actual results and determines whether the assumptions are realistic. Are we being too conservative on projecting cash outflows but too liberal on estimating cash inflows? If we identify gaps in cash flows, business owner should begin exploring options for alternative source of capital. Perhaps a discussion with its banking partner to review available options.

A cash flows projection and its assumptions should be reviewed and updated on a weekly basis. When adjustment to the projection and its assumptions is necessary, it is imperative to make those adjustments on a going forward basis so that the going-forward projection is not skewed by timing differences. Monitoring the projection on a weekly basis will give business owner the opportunity to correct course timely when traditional accrual basis financial statements will not. It allows business owner to see whether the company will survive in the immediate and long-term. It is an immensely valuable tool for business owner during ordinary time, and especially in distressed situation.

If you want to know the survivability of your business, please contact us for a complimentary consultation.

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