Small Business Advice Series: Managing your cash flow in tough times

Whether you shut your doors for a few months, saw customers change their spending habits or found your suppliers were unable to keep you stocked, COVID-19 has likely impacted your business. And you’ve probably seen the result in how much cash you now have on hand. Over the next months and even years, this virus may keep challenging the operations of small businesses, making it harder to stay liquid.

Emily Kerr, Regional Vice President of Business Banking at BMO offers insights into how to effectively manage cash in these unstable times.

Question: What are small business owners telling you about cash flow?

Emily Kerr: COVID-19 has created significant disruption across every type of business in most industries. Now that the economy is restarting, we’re hearing they’re concerned about how consumer spending patterns may change long term. They’re worried about the depletion of cash flow reserves, which they may have dipped into to survive. They are also concerned about cash flow in the future, especially if they’ve taken on additional debt, which will have to paid down.

Question: Why does cash flow matter?

Emily Kerr: Cash flow is truly the life blood of any business. It’s the timing of cash coming in and cash going out that keeps a business afloat. If you’re not liquid enough, it can compromise your ability to pay your employees and suppliers and stay in business. Many businesses with a great idea and market for their product or service have failed due to insufficient cash flow.

Question: How can business owners track their cash flow in uncertain times?

Emily Kerr: In a typical business environment, we suggest doing month-by-month cash-flow projections, looking ahead to the next year. Forecasts should cover all the cash going in and out of a business and calculate the burn rate for cash in the company. However, now, we’re recommending business owners do their cash-flow forecasts weekly. We ask them to do a best case, probable case and worse case scenarios with regards to sales, receivables and other factors.

Question: How can you slow that burn rate and ease the cash flow crunch?

Emily Kerr: Businesses should itemize their discretionary and non-discretionary disbursements. While there’s not much you can do about non-discretionary expenses like rent or property tax, perhaps some discretionary items could be reduced or eliminated for a period of time. Owners should keep an eye on receivables by regularly communicating with customers and assessing how they’re doing. If they need more time to pay, is that a temporary situation or a bigger problem? Speak to suppliers and negotiate better payment terms to get a little extra breathing room. Now might be a time to assess your customer and supplier concentration risk, and look to diversify.

Question: What if your cash flow forecast reveals that your business is in real trouble?

Emily Kerr: Sometimes, business owners do a burn-rate calculation and realize the length of time they have is just too short. In this situation, business owners should be sure they’ve exhausted all the resources available to them, such as the wage subsidy, bank loans, increasing their line of credit or tapping into personal cash reserves. Bringing on investors is a good alternative to borrowing. Exchanging equity in return for a cash influx means you don’t have a loan you need to repay later. Such an investment could be part of a succession plan, and solve two problems at once. If they can buy time, many business owners can find a way to pivot and offer a new product or service that’s in demand. This has been the silver lining for some businesses under COVID. At times like these, there are opportunities for innovation and creative thinking that can change companies for the better.

Your company may be experiencing cash-flow challenges over the next months or years. Reach out for extra help and support via our cash flow projection template or look to our full Crisis Planning Guide to help you get through.