Written by Cassidy Jakovickas CPA
Looking back, we’ll think of 2020 in three parts: before, during and after lockdown.
While the last few months have been difficult to say the least, there’s now light at the end of the tunnel. Countries around the world are easing restrictions and it looks like lockdown will soon come to an end.
But what does that actually mean for US organizations? March, April and May slowed everything right down. And what June, July and the rest of the year have in store, it’s impossible to tell.
One thing we can be sure of, though, is that life after lockdown will be far from “normal.” The road ahead is rocky, and not all businesses will make it to the end.
Here in Fresno, the shelter-in-place order was officially lifted on May 26th, so some businesses are re-opening their doors — subject to social distancing and health checks, of course. This is the first step on that rocky road, but there’s a long way to go.
Fresno County business owners, and leaders across the country need to focus on one crucial thing in the months to come: cash flow planning.
Revisit variable costs
Like most businesses, you probably scaled everything back when lockdown started. Smart move. But now you need to review your variable costs as you scale back up.
A variable cost is one that changes depending on your business output, such as:
- — Raw materials
- — Stock
- — Packaging
- — Labor
While you need to work on covering your fixed costs again, bear in mind that you’re not entering the same market that existed before lockdown.
You need to think about what this market’s demand for your product or service is going to be. Are people going to be flocking to you now that restrictions have been relaxed? Or could they be slower to return?
If you’re in the hospitality or travel sector, then you might get a small spike at the start. But the majority of people will likely take their time and remain pretty risk-averse in the coming weeks.
Ramp up your variable costs too quickly — by bringing everyone back to work full time, or investing heavily in inventory, for example — and your expenses can quickly outpace your profit.
Plan cash flow in the short term
Short-Term Cash Flow (STCF) planning is a great tactic to familiarize yourself with as you move from surviving to thriving post-lockdown. Short-term cash flow planning helps you plan for when your cash inflow and outflow will be lean. Using short-term cash forecasts, you can prioritize payments to suppliers and decide when to collect on customer invoices and debts. By gaining a detailed understanding of your cash position, you’ll be able to spot and account for liquidity issues before they arise.
To adopt a short-term forecast, you generally want to:
- — Draw up a weekly forecast and review it regularly
- — Forecast up to a maximum of 13 weeks at a time. This is a small enough window for you to focus on what’s important, while still covering a full financial quarter
- — Avoid omitting unusual receipts and payments. It’s helpful to check receipts and payments against bank statements so standing orders, VAT refunds, and other payments are included in your forecast.
- — It’s important that you note whether cash in your accounts is “trapped” (i.e., posted as collateral, minimum cash balances) or available since this impacts the accuracy of your forecast.
Focus on turning a profit fast
As we emerge from heavily restricted trading terms, now’s the time to really look at your bottom line. Essentially, you need to turn a profit as soon as possible — so what products and services are going to do this for you?
Next, think about how you are going to resource work that comes in. Chances are, you’ll still be operating with a skeleton crew in the months leading out of lockdown, and that would be wise — as we said before, if your labor costs soar straight away, you’ll struggle to break a profit. You need to think strategically; get as many hands on deck as you need, without any unnecessary spend.
Finally, think about how you’ll stay lean and flexible as you open things up again — the situation could still change week by week!
Support staff coming back to work
The most significant variable cost in most businesses is their staff. However, it can be damaging to think that limiting staff and staff-related expenses like wages and benefits will increase your business’ financial health.
Remember: when employees feel supported, they will be more motivated and engaged. And that has never been truer than right now as your employees return to work.
Even if you aren’t able to bring everyone back to work at the same time, look for other ways to support your employees — both financially and emotionally:
- — Involve them in the planning process — let them know what you plan to do, when and why
- — Consider any extra needs they might have such as childcare
- — Offer flexible hours if you can
- — Support their physical and mental health as they return to work
- — If you’re not offering them paid work right now, can they take sick leave?
- — Can you utilize the relief bill, or get a business grant, to pass on to your payroll?
The truth is, some of your employees simply won’t want to return to work — how are you going to handle that? Offer extended leave, or serve them their notice and risk either the expense of hiring new staff or the strain of being short-handed?
While this may not feel like a cash flow tactic right now, get your HR approach right today, and it’ll pay great dividends in the future.
Keep your online business going
Plenty of businesses have strengthened their online presence in 2020 — and this should continue after lockdown. Restaurants and cafes should retain home delivery as a sales channel, and Realtors should keep conducting virtual open houses, and so on.
Online or virtual services could provide a vital source of revenue for a lot of businesses for a long time.
Planning for the future with cash flow forecasts
Maintaining healthy cash flow is critical for managing debt in your business. With cash flow forecasts, specifically short-term cash forecasts, you can confidently operate strategically and proactively, rather than reactively. Ultimately, better strategy and accurate financials lead to well-informed business decisions that drive profitability.
Cassidy Jakovickas, CPA, is president and CEO of MBS Accountancy Corp. in Downtown Fresno.