Thursday, 23 July 2020

Even in good times, small businesses often experience a cash flow crunch.

After months of pandemic-induced shutdowns, maintaining adequate cash flow is likely even more challenging. To stage a successful comeback during and after this crisis, small business owners must understand their liquidity needs and their options for improving cash flow.

Determine what you have—and what you need

The first step to overcoming cash flow challenges is to understand exactly how much liquidity your business has. Your business liquidity includes any cash you have on hand, but it also includes any available lines of credit, completed but uncollected sales, and government stimulus funds, such as any funds received from the Payroll Protection Program. All these sources represent cash that is available to your business, even if you don't have the cash on hand.

When you've calculated your total business liquidity, take time to assess your cash flow needs. For instance, if your workforce has shrunk, you may not need as much cash available to make payroll at the moment. But if your business needs to make purchases to prepare for post-pandemic operations, such as masks and plexiglass, you may need extra cash to make those purchases. Also, if you're hoping to ramp up new services or processes, such as online ordering or delivery, that may also require extra cash.

Boost your cash flow

After you have a solid understanding of your cash flow needs for the coming weeks or months compared to your current liquidity, you may find that you need to increase cash flow. There are a number of ways to boost cash flow in the short term in order to expand your business and recoup potential losses due to the pandemic. For example:

Rethink pricing structures. You may be able to apply new pricing to help drive demand during a slower time or for slower moving products. For instance, a retail store that was closed or experienced low foot traffic during the spring and summer may have an abundance of beach towels, patio furniture and other outdoor products. To increase traffic and sell off extra inventory, the shop could offer a “sunshine sale," attracting customers with deep discounts to help them prepare for a better summer in 2021.

Increase efficiencies. The way your business has always operated may not be the best way anymore, or at least not in the current environment. The pandemic and related economic uncertainty has driven widespread changes throughout all areas of our lives (homeschool, anyone?). That means it may be the right time to find new ways to run your business to cut costs. For example, do you still need a brick and mortar location or can you operate successfully virtually? Even if you need a physical location, some employees may be able to work remotely.

Consider new ways to generate cash quicker. In a new environment with tighter margins, your business may need additional access to cash. If you sell to large customers such as Amazon, they may offer vendor finance programs that allow you to get paid faster at a slight discount. If you depend on outside suppliers, consider working with them on supply chain financing: Your financial partner would pay the supplier early on your behalf, and you can pay back later when your customers have paid you.

Invoice factoring may be another option. Typically, a factor or financial partner purchases a large pool of receivables from your company at a rate of 50 to 85 percent of the invoice amount. The factor then assumes the risk of nonpayment by a buyer, and you get paid right away.

Discontinue certain services to preserve cash flow. Think about the services your business provides, and whether they continue to make sense in a tight cash flow environment. For instance, maybe you should stop providing free shipping on online orders, or stop offering free gift wrapping.

Moving business forward during and after the pandemic may be challenging, but it's not impossible. Your future success may depend on getting a firm handle on your cash flow needs and opportunities, and maintaining a focus on liquidity.

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