COVID-19: How to Manage Your SME Cash Flow During a Crisis

While COVID-19 has impacted all businesses, there’s no doubt that SMEs have, and will continue to be, hit the hardest. One of the biggest reasons for this is that smaller businesses tend to operate with only a few months of cash flow.

As cash flow is critical in times of crisis, a limited reserve can make SMEs more susceptible to financial devastation. Because of this, developing a cash management plan as part of your overall risk and continuity plan is key to survival.

Here we take at how you should approach it and offer suggestions for what actions your plan could include.

If your SME is struggling financially as a result of COVID-19 and your own efforts are not working, contact us today to arrange a consultation.

Currently, it looks like we are facing a period of disruption of at least six months (April to September). At least, this is when the Federal Government’s fiscal stimulus packages end.

With this in mind, your SME should be looking at scenarios and developing cash flow plans for this period.

But what happens when the financial support ends? And what will life and business look like when it does? At this point, we don’t know. Because of this, your cash flow management plans should extend beyond the six months into the new normal, whatever it looks like.

Tactics first, strategy second

While developing a cash flow plan that encompasses the now and next is crucial, creating and adopting a new strategy in the middle of a crisis isn’t easy and can take time. Therefore, focusing on tactical cash flow management is a much better place to start.

Tactics such as cutting costs, improving margins and releasing cash from working capital can help you stabilise your business, fast. They are also cheaper and more controllable options than additional debt and equity.

Yes, they can be hard to do. However, cutting deep in a sustainable way is vital in a critical turnaround plan. But where can these cuts and savings be made?

The answer, of course, depends on the specifics of your business and industry, but here are some crisis-focused cash flow management tactics to consider.

Release working capital

Instead of focusing on profit and loss, turn your attention to working capital and three key areas: speeding up your receivables, slowing your payables and selling your inventory.

Firstly, start collecting cash daily if not weekly and consider offering a small discount for early payment. In addition, put a system of escalation in place for non-payment, giving your most valuable customers more leeway.

Next, communicate with your creditors and ask for extended payment terms and reductions in cost, within reason. Finally, offer valuable clients discounts on inventory and consider varying order quantities, safety stock levels and lead times.

Increase your profit margins

There are several tactics you can try to increase your profit margins. These include adjusting your business plan to focus on your products and services that generate the most profit, letting go of money-draining clients, optimising your prices, identifying unnecessary expenses and cutting back on new customer acquisition marketing.

Reduce staff costs

Keeping your staff is likely a priority so, instead of heading straight to redundancies, look for ways you can lower your cost base. Things to consider are voluntary pay cuts or reduced hours, a hiring freeze, winding down leave balances and managing stand-downs.

If redundancies do need to happen, stagger them according to need. Cut casual and back-end/support staff before your permanent front-liners. Keeping your key employees will enable you to stay functioning. It will also give you the ability to pivot quickly when the new normal kicks in.

Check your fiscal package entitlement

During periods of crisis, government’s will often step up to provide stimulus packages, as we have seen previously with the summer bushfires and now with COVID-19.

Most notable for small businesses are:

  • JobKeeper payments, administered via the ATO, providing $1,500 per fortnight per eligible employee to eligible businesses
  • The $250,000 unsecured loan being offered by the Federal Government but distributed through banks. We recommend accessing it through your existing bank as you already have a relationship.
  • PAYG Withholding credits – rebates of the tax on employee wages
  • NSW State Government $10K small business grants

Consider other sources of saving/funding 

Look at swapping fixed costs to variable costs where you can. In addition, consider selling assets such as machinery or equipment and leasing it back. Asset-backed lenders can also make available the release of debtors or inventory. If you have a valid litigation claim, look into litigation funders. They can fund a debt owing or a right to sue for damages.

Check your finance options and insurances  

Don’t assume the financing options you had available pre the pandemic will continue to be available. Make sure you engage your financing partners to confirm your lines of credit remain open, as well as to explore alternative options should you need them.

Also, make sure you understand your existing business insurance policies. They generally cover losses arising from disruptions to your customers or suppliers. However, some insurers do make specific exclusions for losses related to pandemics, so it’s worth checking.

Diversify your revenue streams

Think about how you can reimagine your products or services to adapt to now. This is something many businesses are already doing. For example, restaurants offering takeaway and retailers moving everything online. Beyond the crisis, could you retreat from the global supply chain or shift to more virtual ways of working?

In times of crisis like this, it’s essential that you quickly establish what surviving the now and surviving the new normal looks like for your business. Strategy and scenario planning is crucial, but cash flow management tactics like these can start immediately and quickly stabilise your business.