Coping with the Coronavirus Cash Flow Crunch
Revised August 2020.
If you’re like most small business owners, you are suffering from cash flow challenges due to the coronavirus pandemic. With lots of money going out the door and much less coming in, what should you do to cope with the coronavirus cash flow crunch?
In this article, we’ll discuss four critical steps to take to ensure your business survives this unprecedented time:
- Forecast cash flow
- Adapt your business practices to generate income
- Cut costs
- Apply for financial assistance programs
1 | Forecast Cash Flow
Cash deficits are the #1 reason businesses fail. COVID-19 is exacerbating the problem. How long will it take for your business to run out of cash if you have reduced or no income in the near future? You will surely feel stressed and anxious if you don’t have a good handle on how much money you need to sustain your operations.
The solution is a cash flow forecast that predicts future inflows and outflows of cash. By looking ahead, you’ll eliminate the much of the uncertainty about the cash you’ll have on hand next week or three months from now. Not sure of how to set this up? Reach out and we can help!
Remember, do not manage cash simply by checking your bank account balance. A bank account balance is simply a snapshot in time that doesn’t provide insight into how much cash you’ll have in the future.
Want to set up your own cash flow forecast? Great! Here’s how to create a basic cash flow forecast:
- Start with your beginning bank account balance for the time period at hand, whether it’s the current week or month.
- List all your inflows of cash from sales, loans, or other sources.
- List all your outflows of cash such as payroll, rent, and credit card payments.
- Add your total cash inflows to and subtract your total cash outflows from your beginning bank balance. Then you will have a forecast of your ending account balance for the time period.
Still feeling overwhelmed, don’t have a bookkeeper, let alone a CFO? We offer services for both startups and small businesses. In addition, we already have experience helping businesses reopen and bringing them out of their cash flow crunch due to COVID-19.
2 | Adapt Your Business Practices to Generate Income
Many states have ordered non-essential businesses to close. If your business was forced to close, and you are still suffering a loss of income, it’s time to get creative. Brainstorm how you can continue to offer your products and services in a different way. For many, this many mean switching to e-commerce services or product sales.
Do you typically meet clients in person? Determine if you can deliver your services online via video conference instead. Were you selling products at a storefront? Well, you might be able to promote digital gift cards or offer delivery services!
Either way, set up safe, socially-distanced options for your customers to continue to work with you. Stay top of mind. And, don’t overlook the power of social media to do this. Offer special promotions to keep clients engaged.
Be sure to stay on top of your accounts receivable and follow up with customers who are late on payments. Bill customers as soon as you deliver your product or service. Consider using a factoring company (factor) to get an advance on the receivables your customers owe you before their payments are due to you. For more information on factors, see our article on cash flow.
3 | Cut Costs to Increase Cash Flow
If you’re suffering from a severe cash-flow shortage, cost-cutting is essential. What should you do? First, reduce or eliminate all non-essential expenses. Postpone major purchases. Sell excess inventory. Delay payments to vendors as much as possible.
Rent and payroll are the two biggest operating expenses most businesses incur. Ask your landlord or mortgage lender if you can defer payments to a future date. Some lenders are offering rate reductions on existing debt. Payment deferments of up to six months are available on Small Business Administration 7(a) and 504 business loans and microloans. Learn more about SBA loan deferments.
Lastly, in this exceptionally low-interest rate environment, consider consolidating and refinancing any existing debt at a lower rate to save on interest expense. Contact your lender or finance professional for assistance.
4 | Apply for Financial Assistance
The Small Business Administration’s Economic Injury Disaster Loans (EIDLs) and the Paycheck Protection Program (PPP) forgivable loans are federal financial assistance programs available to small business owners.
SBA Economic Injury Disaster Loans are available to businesses and non-profit organizations suffering losses from COVID-19. The funds from disaster loans can be used to pay your employees, vendors, and creditors. Disaster loans provide up to $150,000 in assistance for business owners and have favorable terms including low-interest rates, and long payback periods.
The Paycheck Protection Program provides forgivable loans to small businesses to pay their employees during the pandemic. The loan amount is based on 2.5 times your average monthly payroll cost. The entire loan amount will be forgiven (you don’t have to repay it) if you use the proceeds to pay for payroll costs, rent, mortgage interest, and utility costs and you maintain staffing and compensation levels.
Contact your local bank to find out if it is participating in the program. Get all of the details about the Paycheck Protection Program.
In addition to exploring federal assistance programs, research financial assistance programs that are specific to your industry and location. Special funds have been established for businesses in various industries. In some areas, local government agencies are also providing assistance.
For example, the City of San Diego’s Small Business Relief Fund is available to local businesses affected by COVID-19. The fund provides grants and forgivable or low to zero interest rate loans to eligible small businesses.
Final Thoughts on Increasing Your Cash Flow
This is a stressful time for most small business owners as we are all navigating uncharted waters. Don’t hesitate to drop us a message about how we might be able to work together to get you through this cash flow crunch.