The recent measures taken by many countries to tackle the novel coronavirus has affected our daily lives and impacted businesses adversely. The global economy has taken an unexpected turn and organisations, irrespective of their size are struggling with significant operational, financial, and liquidity challenges.
Undoubtedly, small companies and start-ups are extremely vulnerable to the financial impact of the coronavirus. The top concern of these businesses is to manage their cash pressures to ride out the crisis.
Until the pandemic is over, survival should be the imperative focus for start-ups and small businesses, and to do so the only option is to implement prudent cash management procedures.
The very first step that any start-up or small business should take in this situation is to prepare a cash flow projection. If you are running a business, but do not have a cash flow projection then it is the perfect time to prepare one.
Even if you already have one, revisit the projection and incorporate Covid-19 impacts comprehensively. Once you have the projections, analyse the expenses from highest to lowest, mandatory versus discretionary, and so on.
Cost-cutting is one of the first things considered by almost every businessman. In general, payroll cost is the highest among all other expenses of a business. As such, it is not surprising that many firms around the world are laying off their employees.
However, cost-cutting does not necessarily mean firing employees. Before taking such a drastic step, it is advisable to revisit the other variable or unnecessary overhead costs. It is also wise to convert some fixed costs into variable costs.
A prominent way of doing it is by entering into a sale and leaseback agreement. One must think thrice about marketing amid this crisis. Instead of investing cash on traditional marketing and promotional activities, businesses should focus on engaging innovative marketing schemes and utilising digital and social media platforms that can be accessed with minimal or no cost. This might bring significant advantage to the business.
It is common for businesses to concentrate on profit and losses – building on the top line while managing the bottom line under normal business conditions.
But in many businesses, processing payments or turning the receivables into cash are often taken for granted.
Right now, it is time to shift the focus from the income statement to the balance sheet. In abnormal market conditions, it is essential that businesses focus on improving the collection process. Businesses should concentrate on customer-specific payment performance and make a list to identify the key customers in this crisis.
If any customer has a long payment due, he or she should be pursued aggressively.
Lastly, businesses should try to minimise any errors in billing processes including untimely and inaccurate invoicing, which may lead to costly delays in receiving payment.
It is often beneficial for businesses to delay payments as long as possible. Under the current circumstances, delaying suppliers' payment can be a possible way to preserve working capital. However, such an approach is not always welcome as it might destroy the trade relationship between the parties.
The suppliers would be feeling the pinch of the crisis as well, as such, establishing an agreement with suppliers on mutual understanding and benefit is essential.
All small businesses and start-ups must keep in mind that there might be situations where it becomes necessary to accelerate payables for a critical supplier who is on the brink of failure, to preserve the integrity of the supply chain and prevent a critical disruption.
Inventory management is another key issue for any small or big business. Balancing the size of the buffer inventory and managing cash flow might become more critical in the current situation. Unnecessary stocks are nothing but tied up money that could have been invested in another way. In this period of economic recession, businesses must also focus on optimising cash flow.
So it is advisable to reduce stock to reduce its value and improve the inventory turnover rate. The ultimate goal is to find a balance to establish a minimum stock value, while maintaining smooth business activity.
Lastly, one needs to think out of the box to keep pace with this crisis. Businesses must find out where they are experiencing declines in the revenue streams, and consider alternative ways to generate that income.
For example, many retailers who are experiencing a downturn are ramping up their online marketing strategy to attract new customers. Many online entrepreneurs who were previously selling clothes or other luxury goods are now shifting their concerns to sell necessities like: hand sanitizers, cooking or baking stuff, and so on.
The virus, Covid-19, has shaken up both our lives and business alike and the year 2020 still seems grim. Thus, we must rethink our businesses to survive. As De Rycker from Accel puts it: "Step back and think of your narrative in 2020. Covid-19 gives you the air cover to re-evaluate your business and get down to the bone."
The author is currently working in a leading investment bank in Bangladesh