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Cash flow contingency planning: why speed is crucial

Kriya Team
March 24, 2020
4
min read
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Businesses the world over are feeling the effects of COVID-19. The Treasury had to act quickly to lighten the economic burden. Here’s why you should too.

Businesses the world over are feeling the effects of COVID-19. The UK Government has announced a series of measures to help lighten the economic burden and support business owners. Delayed VAT payments and commitments to covering 80% of employees’ wages, alongside other policies, come as a huge relief. In these unprecedented circumstances, the Treasury had to act quickly. Here’s why you should too.

CASH FLOW IS VITAL

You’ve heard it plenty of times before and probably said it yourself: cash is king. For business owners, being profitable doesn’t necessarily guarantee survival. If you don’t have adequate cash flow, you won’t be able to pay your suppliers, staff, rent and business taxes.

THESE ARE UNPRECEDENTED TIMES

We don’t know how long markets will be affected or the extent of the challenges we’re facing. Lockdowns and social distancing have altered the public’s behaviour drastically and it’s hard to predict how this will play out. Now’s the time to move fast and plan ahead for your cash flow requirements. Preparing for all eventualities is key.

Work out what bills you need to pay when and which economic measures or funding solutions are right for your business. The Government website has all the details of the support available to businesses. The sooner you can get cash flow sorted, the easier it will be to weather the disruption.

Stress test your business model to see how much cash headroom you have and where your breaking point is. Prepare for a range of scenarios as ongoing uncertainty makes accurate forecasting more difficult.

WHAT ARE THE EFFECTS ON YOUR CUSTOMERS AND SUPPLY CHAIN?

Ask yourself how behavioural changes in these two groups will affect your day-to-day cash flow cycle. It’s important to consider your whole business ecosystem. You may be seeing customer demand dropping or surging in your sector or for your products/services. What does this mean for your margins? Your suppliers may also decide to enforce stricter payment terms. You need to assess if you’re at risk of your payment terms being changed. Then work out how to minimise the effect this would have on your cash flow.

As far as stakeholders are concerned, it’s always better to be upfront and have conversations about your situation quickly. People are more likely to help if you let them know early on about any difficulties. If they’re shareholders or provide debt for a range of businesses, you being first in the queue to ask for new payment terms may be an advantage.

KEEPING UP WITH PAYMENTS

Why pay outstanding bills? Missing and delaying payments will harm your relationships with investors, suppliers, customers and your team. But crucially, if you don’t pay, this will have a financial impact on other businesses. We’re all part of complex global supply chains and every business owner has a role in keeping others going. We’re stronger together.

As an employer, you’ll want to support your employees and keep them in work for as long as possible. The Government has offered to pay 80% of all salaries where COVID-19 has had a direct impact on business. Sounds great? It certainly is reassuring, but you need to prove you’ve paid your staff first and claim the money back later. So you’ll still need cash to hand in order to safeguard your teams.

BANKS AND GOVERNMENT DEPARTMENTS ARE INUNDATED WITH DEMAND

While the Government’s economic measures are intended to alleviate cash flow concerns, it remains to be seen how easy they are to access. We’re hearing reports of people waiting an hour to get through to their banks to discuss Coronavirus Business Interruption Loans. HMRC has set up a special phone line for their tax deferral department – you can reach them on 0800 0159 559. However, this specialist team is not set up to work from home. Staff shortages mean it takes a long time to get through, and they are now working on a reduced timetable. Your planning should take any such delays into account.

The Government also announced that they would fund Statutory Sick Pay for employees in businesses affected by COVID-19. However, this measure functions through claiming back money only after employers have paid up.

With the details of Government schemes yet to be finalised and the majority of measures working through refund, cash is still king in the short term. It’s vital that you maintain healthy cash flow to pay your employees and suppliers. You can claim back money spent on wages, but this needs to be paid out first. There’s a lot of uncertainty currently and having enough cash to prepare for the unknown is crucial. Don’t waste time – plan your strategies and work out exactly what you need now.

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