Covid 19 – Managing cash flow during the crisis

Managing business cash flow during a world wide pandemic is a challenge none would have anticipated, much less prepared for.

The primary factor on everyone’s mind during this time would be how to manage cash flow to meet commitments and ensure business continuity.

With little to no sales, during the MCO period, a business would be struggling to meet the fixed expenses like rentals, salaries, as well as make payment on supplier invoices that would have come due.

To make matters worse, customers would probably not be making any payments on invoices that have come due during this period. Understandably, they would be in a similar cash strapped situation and hanging on to whatever funds they have with the hopes of stretching it out for as long as possible.

A report in The Edge Markets states:

Malaysia small and medium enterprises (SMEs) said today they expect no cash inflow for at least three months due to the nation’s ongoing movement control order (MCO) to curb the spread of the Covid-19 pandemic

SME Malaysia national president Datuk Michael Kang said in a statement that the biggest challenge for SMEs is cash flow.

He adds, “Most SMEs are very tight in cash flow. It is expected that there will be no cash inflow for at least three months due to MCO. Yet, SMEs will still need to continue paying full salary, rental and some statutory payments. Nearly one-third or 33.3% of SMEs can only have enough cash flow for March while 37.8% can only sustain up to April.”

While the government has provided assistance through stimulus packages, it’s still a catch 22 situation for most if not all businesses.

In short, business cash flow also appears to be under “movement control order”.

A period of reconciliation

There is no magic formula or fix for this. You certainly cannot call up customers and demand payment.

As difficult as it may seem, this needs to be a period of having to compromise.

Adopt a 2 step approach to help you see the business through this period.

The first step is to go through your receivables and review it. The usual expectation of having cash coming in from customers in the 30, 60 or 90 day window no longer applies. You need to do an extended cash flow projection.

What you normally would have expected to come in is now extended to beyond the usual terms. Invoices issued in January and February would not be paid in March, April or even May.

With the receivables, reach out to customers and discuss when they would be able to start making payments. Even partial payments should be acceptable as it means some cash coming in.

This would give you an idea of your cash position in the future.

The second step would be to look at bringing in sales to ensure continuity of business. To achieve this, unless you are primarily in the service industry, you would need to talk to your suppliers.

With the projected cash in flow from customers in hand, look through your payables.

To maintain the supply chain of inventory, you would need to also appease your suppliers with an indication of when you can settle some of your pending invoices. While you may not be able to make full payments, your suppliers would be more open if some payments are forthcoming. After all, they are in the same situation your business is in and would also be looking at ways and means to keep it going.

In doing this, do also keep in mind that there are other commitments such as salary, rentals, etc and that you would need some cash reserves.

Above everything else, let’s remember that we’re #inthistogether. Only by working together and collaborating will we be able to see this challenge through.

Stay safe.