Managing cash flow in a crisis
Last editedMar 20212 min read
5 steps to take from immediate action to building long term resilience.
Our CFO Catherine Birkett recently shared her experiences of managing cash flow, in tough times and good. Here are some highlights of her advice; and also how the right payment method will help you weather the next crisis.
1. Start how you mean to go on
Stay calm: take yourself out of the drama and focus on the factors you know. Unnecessary knee jerk decisions may have long term consequences after the crisis has passed.
Adopt a ‘lead by example’ approach. Commit to taking on your fair share of the burden of pain, at an employee and company level.
Keep perspective: the way you will continue to create value to the economy and individuals is by ensuring your business survives. That must be your priority, and the lens through which you justify the tough decisions you will need to make.
Don’t go it alone: call on your professional networks and peers for ideas and support.
Have honest conversations (and keep having them) with your key stakeholders, internal and external. A crisis is easier to cope with when everybody knows what’s going on.
2. Diagnose the impact
Calculate your current cash position.
Forensically analyse your cost base: what’s discretionary and what’s not?
Understand your working capital position: both debtors and creditors.
Identify the key ‘leading indicators’ of your revenue, and which have been impacted most.
Reforecast revenue and build out a set of scenarios for 6 & 12 month views.
3. Take short-term actions
Freeze discretionary spend.
Impose approval limits on essential purchases.
Pause hiring and review any salary adjustments already in progress.
Identify ‘at risk’ revenue in your existing customer base.
Identify opportunities to improve working capital, both with debtors and creditors.
Identify potential sources of public and private funding and support.
4. Take mid to long-term actions
Protect valuable customer relationships by extending payment terms and/or allowing them to pay by instalments where appropriate. It’s important to strike the balance between immediate survival and coming out the other end with goodwill and a strong brand.
Review your suppliers and their contracts. Appreciate that this may be an opportunity to negotiate more favourable terms.
Consider structural changes including headcount and rationalising your product/service portfolio.
Identify efficiencies in your order-to-cash cycle through simplification and automation. Measure the impact of each improvement so you can implement the best on a permanent basis.
5. Use payment methods to build long term cash flow health
As we have highlighted, cash flow is influenced by many factors. One of the less appreciated levers is your choice of payment method. The right payment method can have a profound impact on your long-term cash flow, and your resilience when the next crisis comes around.
Payment success: A failed payment has multiple consequences for a business, but the most obvious is on cash flow. It not only results in immediate lost revenue, but also expected future revenue if the customer is lost to churn.
Speed of settlement: Lots of factors impact the speed of receiving the funds from a payment, including how many parties are involved in the process and what’s involved in clearing the funds for payout.
Visibility of real-time payment status: The quicker you know about the status of a payment, the faster you can act. If a payment has been successful, and you have the right information about the payer and their transaction, you can reconcile your financials faster. Equally, knowing the moment a payment has failed, and why, lets you do something about it.
The total cost of running a payment tool: Lots of factors affect the cost of using a payment method, which then impacts cash flow. Some come at the start, with set-up and integration, or the investment in complying with national laws and regulations. Other costs are ongoing, such as your provider’s fees, the level of automation and the day-to-day management.
Preference: none of this matters if people do not want to use the payment method you offer. Lots of factors determine preference; is it familiar, easy to use, and trusted? Or more fundamentally, is it even available where your customers are? Payment method is not simply a financial tool, but an enabler for growth.