COVID-19 Cash Flow FAQ

We all are working to survive this current environment so that we can THRIVE on the other side of it. To help, I wanted to share some of the common questions our clients and friends are asking us regarding cash flow and our thoughts on how to better manage and measure your cash flow to make confident decisions during this unique time. If you want to learn more, have further questions or want access to our cash flow tools, register for one of our upcoming cash flow webinars here.

Q: What is your number one tip to improve cash flow?

A: There are many things that you can analyze on your balance sheet from accounts receivable and inventory to accounts payable. The most common improvement most companies can make is standardizing their invoicing and accounts receivable processes. Too often, companies wait until the end of the month to invoice. Could you invoice earlier in the month to speed up collections? Can you bill every week or every other week versus once a month? Ensure that you submit your invoices ON TIME. We have seen many companies who are supposed to submit invoices by the 26th of the month, invoice them days late, which pushes back payment on that invoice another month since it is processed in the following month instead of the current month.

The other process your team should implement, is following up on collections. Companies rarely take the time to follow up on their payments because they don’t want to have the tough conversations around past due invoices. If your payment terms are 30 days, what is your process to follow up with customers once the invoice is 31 days past due? Regular communication with your customers can speed up collections dramatically so take the time and effort to create a system that works for you. You might want to even consider how you can eliminate payment terms all together. Just because it’s the norm for your industry to have x days as your payment terms, why can’t you receive payments/deposits up front or have a schedule of payments with the customer payment information on file ready to be processed at the agreed upon date.

Q: If you are in a solid cash position now, should you ask your lenders for relief anyway to improve cash flow in the short term even if you don't need it. Will this hurt credit in the future?

A: It depends. We use a 16-week cash projection tool with our clients that lets them see how far they can stretch their cash. If you are projected to run out of cash during that 16 week period or cash will become extremely tight at some point, you will want to evaluate the options you have which includes asking your lenders for relief during this time. If you are showing a steady or positive cash flow, you may want to hold off on asking your lenders for relief until your business truly needs the assistance. Relief on your business loans would not have an impact on your personal credit score, even if you are a personal guarantor. Those debts remain in the business and are owned solely in the business which would prevent any issues on your personal credit. Either way, we recommend implementing a cash flow projection tool that works for your business so you can make an educated decision based on your situation.

Q: If you are solid financially now, is it a good time to negotiate a larger line of credit?

A: Absolutely. Lines of credits are a great insurance policy for businesses. For a minimal annual renewal fee, you have added protection to borrow funds in times of need. You never know when you may run into a situation where you need to borrow funds, so it does not hurt to have more available to you. This does not mean that you ever have to use the additional funds, but it increases the safety net you have just in case.

The biggest challenge that businesses run into is misusing their line of credit. Instead of using a conventional loan to buy a piece of equipment or make an investment in the business, some owners have decided to use their line of credit for this instead. The line of credit is only supposed to be used as a safety net against your receivables depending on the timing of when you receive cash. For example, if you are $10,000 short on payroll, you can borrow against the line of credit for that amount and pay it off once you collect from your accounts receivable the following week. It is not meant for these long-term types of purchases. It can even hurt you in the future if you misused the line of credit for one of those longer term expenses and run into a cash flow position where you need to float cash for a week or two but have exhausted your borrowing potential since you have a large outstanding line of credit. Also, be sure to keep making regular payments on your line of credit. Lenders want to see regular payment activity since the line of credit is meant for temporary borrowings. Each year, lenders do an analysis of the line of credit for renewal. If they see that you keep a steady balance on the line and there is no movement, they might want to term out the balance instead of keeping the line of credit.

Q: Should we start to use our line of credit in these crazy times even if we don't think we need it?

A: Similar to debt relief from your lender question, it depends. Again, implement a  cash flow projection tool to see when you may run into cash flow challenges, if any. That will help you align your line of credit borrowings with the needs of the business, because you will be able to see how short your cash balance is. You can then determine if your line of credit is enough to endure that stretch of time, or if you have to make other choices around your cash flow.

Q: How should companies start looking at cutting expenses.

A: The first place many owners move to is cutting all of the little expenses that do not have an impact on the business. While those are expenses you can cut, they tend not to make a major cash savings impact for you. Instead, start with looking at your revenue and expenses in relation to just $1. If you have $5 million in revenue, convert that to $1. Then, for all of your expenses, divide the total by your revenue to get a percentage of that $1. For example, if people costs represent $2 million dollars, than that is $0.40 of your total $1. $1 million in marketing expenses would be $0.20 of that dollar. Do this for every expense category and see where your biggest expenses are and start looking for improvements there. A one to two cent change in these categories can often provide a bigger impact than all of the smaller expense items combined.

Q: From your work with firms across industries and across 4 recessions, do you have a standard recommendation with regards to sales and marketing - cut or invest in more - what do you recommend someone do right now?

A: This is a common question, and a tough one as everyone’s marketing situation and potential are different in various environments. Some businesses are booming during the Covid-19 time while others are forced to shut down completely. This is an unprecedented time and marketing will depend on your own circumstances. Now is definitely a time work on all processes and systems. We mentioned accounts receivable above, but this also includes inventory management, expense management, production efficiency, team training and sales and marketing plans. Marketing spends are an investment and just with every other investment, you will want to see a return. Start with a clear plan of what results successful marketing will mean to your business. From there, you will have identified specific measures that you can track to see if your marketing is providing the return you expected. There is a fine line between not seeing results yet because the marketing system is new and is still getting started and not seeing results because what you are trying isn’t working. Measuring your results will help you decide between the two and help you identify if you should cut expenses or continue investing.

Q: How do you shift teams from focusing on revenue to gross profit to increase profitability and cash flow?

A: Business owners are fascinated with revenue. However, revenue means nothing if it doesn’t drive profitability. Gross profit tells you how much money you have after producing your products/services to generate that revenue. This gross profit is the amount you have to cover all of your fixed overhead expenses and ultimately determines your level of profitability. You can have extremely high revenue numbers, but if you don’t have the gross profit from those revenues to support your daily operations, you are in big trouble. This is why gross profit is the most important number for you and your team to manage, not revenue.

It all starts with education. At MACKEY, we run our business on complete open book management. We discuss our financial results with the team monthly, so everyone is aware of our revenue, expenses and profits. This can be a scary thought for most business owners because they don’t want to share the profit number with their team. In most cases, the team already has an idea in their head that you make way more than you actually make. A good exercise to start with your team is to give everyone 100 pennies. Ask them how many pennies they think you spend on people, marketing, rent, etc. until they have a final amount left over. Once they note what they have left over, restart the process and walk them through how many pennies these costs actually represent in your business. Many team members will be surprised what the final results are.

Once your team has an understanding of what it takes to run the business financially, they can better connect how their work impacts the business results. You can then start to implement scorecards for your team to track the results in the 1-3 key activities each employee is responsible for achieving. This isn’t to micromanage your team by any means, it’s to help your team be the most successful in their role that they can be. It is human nature for people to want to make a positive impact through their work and this helps pave the way for your team to manage and improve that impact.