Position for the Recovery through Cash Flow Planning

If there is one word that best describes 2020 it would have to be instability. The COVID-19 pandemic has created new challenges for individuals, businesses, and organizations. Efforts designed to flatten the curve while important to public health have created dire economic conditions. Businesses were hit sharply when forced business closures and modified operation regulations were implemented leaving many without the ability to generate income. The drop in demand lead many to furlough or layoff employees to maintain financial vitality. Now that these orders have been lifted, many Atlanta businesses are looking to the future and planning for recovery. An important component of the preparation process is cash flow planning. While businesses should start with a 13-week rolling cash flow projection, it is also important to look at longer periods as well. To help clients, prospects, and others, Wilson Lewis has provided a summary of key planning considerations below.

• Accounts Receivables – Reducing the time it takes to receive payment is critical to maintaining healthy cash flow. Consider the following items when reviewing accounts receivable.
  • Upfront Deposits – Many businesses only invoice once the project is completed or ordered fulfilled. While this may make things easier for the customer it has a reverse effect on the business. Consider asking customers, especially new ones, for an initial deposit, and then bill the balance upon completion as it will provide access to needed cash.
  • Invoice Timing – Many businesses will send invoices on a specific date, usually at the end of every month. Consider submitting invoices immediately upon the delivery of products, supplies, or services. This will help to reduce the time between delivery and payment.
  • Progressive Invoicing – Some businesses may want to consider generating an invoice every two weeks to cover services delivered. While this may be a difficult change for long-standing customers, it should be easy for new ones.
  • Payment Options – Consider offering customers a small discount off the invoice for early payments. When it makes sense, this can be an effective method for generating income much more quickly. 
• Cut Expenses – While many have already been forced to cut expenses things will change as the recovery continues. Unlike the survival phase where businesses were making immediate cuts, the recovery is different. Reconsider the expenses which need to be cut to accelerate the recovery plan.
• Negotiate Payables – Extending the amount of time available to pay vendor invoices will help to reduce the strain on working capital. Discuss the possibility of discounts or extended payment terms. While not all will be able to make such concessions, it is likely there are key partners who will.
• Inventory Management – It is important to optimize the company inventory management policy to avoid carrying an unused or unwanted inventory. For this reason, it is important to track inventory levels and have a clear understanding of what sells quickly and what may take longer to move. In addition, gain an understanding of how long customers are willing to wait to receive shipments. This will permit the company to more accurately identify when and the optimal amount to reorder. These changes should lead to more effective management of inventory and less strain on cash resources.  
• Cash Flow Forecast – A forecast is an important tool that allows executives to understand the cash flow situation and adjust as needed. A standard 13-week projection which includes inflows and outflows each week will provide the summary level information needed to understand the impact of recent sales, expenses, and financing activities. Regularly reviewing the forecast will allow management to identify trends and provide additional time to maneuver.

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A robust cash flow plan will not only help management identify issues impacting the business today but will provide essential insights necessary to move the business towards recovery. Whether your business is currently being impacted by COVID-19 or is preparing for the future, the value of cash flow planning can not be understated. If you have questions about the information outlined above or need assistance with an accounting or tax issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.