Without question, times are exceedingly tough right now, and many businesses will struggle to weather the storm the world is facing. But having control over your cash, and visibility of its future position, can help you emerge from the crisis and move forward.
Assess Your Cash Flow: Know Where You Stand
Anytime your business faces a crisis, it’s important to assess the impact of the situation as soon as possible – and as comprehensively as possible – so that you know where you stand. Consider four areas of impact to focus on right now:
- Your short- and long-term cash position. In simple terms, your future cash position is an assessment of what you have today, plus what is expected to come in, less what is expected to go out. In ordinary times, future cash forecasting is a relatively straightforward exercise, particularly if you’ve been in business for some time. You know the rhythm of your business and your industry. In times of economic uncertainty, however, that rhythm goes out the window and forecasting your short- and long-term cash position becomes more challenging.
The best way to get a sense of your future cash is to run a sensitivity analysis, including a number of different scenarios. It’s “What If” planning that can help you prepare for whatever the future brings. For example:
a) What if you can collect all existing receivables, but you don’t add new revenue in the short-term?
b) What if you can collect all existing receivables and you continue to earn contracted revenue?
c) What if some of your receivables come in late or don’t come in at all?
As you plan, you’ll want to make some assumptions as to the number of months your business will feel the impact of COVID-19 and the effect it will have on sales. If you’re losing money, calculate your burn rate now so you know how long it will take you to go through your capital.
To calculate your burn rate:
Gross burn rate = cash / monthly operating expenses (if not currently operating)
Net burn rate = cash / monthly operating losses (if operating)
- Your Payables: While it might feel like much of the world has ground to a halt, your business still has a responsibility to pay suppliers, staff, rent, insurance and equipment/ automotive leases. There are two keys to maintaining as healthy a cash position as possible: Organize and Prioritize.
- Your Receivables: Two potential impacts to COVID-19 on your receivables: New sales may be harder to come by, and existing customers may be slower to pay. While you may already have a clear view of what is expected to come in, at this time it’s important to look at it with a lens of the financial health of your clients. Will they be able to pay? If they are struggling, can you offer deferrals to ease the crunch for them?
- Your Supply Chain: Determine what impact there may be to your ability to produce or purchase product. Will suppliers be able to deliver necessary items to manufacturers? Will manufacturers be able to maintain the productivity levels required to deliver goods to you? If you’re negotiating or bidding on domestic or international contracts, it might be worth considering applying for an RBC Bank Guarantee, which can assure your suppliers of your financial integrity without tying up capital. It can also protect you in situations where advance payments or a performance guarantee is required.
Six Strategies to Optimize Your Cash Flow Through COVID-19
Once you have assessed the impact of the pandemic on your business and know where you stand, consider actions that could help control the flow of funds in and out of your company. And this flow is what is going to allow your business to not only endure the crisis but push forward once it’s over.
1. Regularly monitor and forecast your cash flow
At this time, more than ever, you need to always be reviewing your cash flow. That means a daily monitoring of cash balances and reconciliation with your accounting or Enterprise Resource Planning (ERP) software to know your up-to-the-minute working balance. It’s a good idea to implement a cash flow forecasting process on a 13-week cycle to help drive your short-term decisions as they relate to payables, receivables and inventory.
With NOMI for Business, available on the RBC Mobile app, you can get a snapshot of the money going in and out of your accounts.
You can also use the RBC Business Cash Flow tool to get an analysis of your current cash flow position.
Offering digital payment methods can help you get funds into your business faster. Credit and debit card payments, Interac e-Transfer transactions and mobile payment options enable you to speed up finality of payment. Digital payment options also minimize fraud and make reconciling your accounts faster and easier. Consider solutions such as RBC’s WayPay, which facilitates funding from multiple sources and provides access to all payment types in a single solution.
3. Optimize your payables
There are a few ways you can keep cash in your business longer when it comes to your payables.
Employee wages and benefits deserve the most attention from you right now. Your top priority is to take care of your people and your community, so it’s worth exploring options that can help you avoid layoffs. Consider temporary reductions in hours, asking employees to defer or reduce pay, or accept equity in lieu of cash. If applicable, you may consider asking founders to set an example by reducing or eliminating their wages first.
When you can pay vendors, suppliers or taxes by electronic means, you need to have cash in hand only at the moment of payment – not before. By avoiding paper-based payment vehicles (i.e. cheques) the amount of time you need to have cash in your account is minimal.
Prioritization / Deferment
As you evaluate the payments you need to make, determine which suppliers are mission-critical to the success of your business and reach out to them first.Many businesses are in the same boat, so your suppliers are likely cash hungry as well.Discuss the opportunity for partial payments or dynamic discounting if you can pay on time. Explore options for deferred payments and see if you can work out payment plans that work for everyone. Keep in mind, the relationships you have with your suppliers are extremely important right now, and the trust you have built up with them will go a long way. Approaching discussions with empathy and understanding will help more businesses get through these times together.
4.Proactively manage your receivables
As you evaluate the money that’s due to come in, it’s important to proactively engage with your customers to find out how they’re doing, and how likely they are to be able to pay on time. Be sure to prioritize customers with large balances, and work together to build a payment plan that is achievable for them.
Consider offering discounts for shorter payment terms, partial payments, or real-time payments such as credit cards or Interac e-Transfer transactions. Signing up for Autodeposit will enable you to receive money sent to you even faster. Remember, regularly monitoring outstanding accounts will help eliminate surprises, keep cash coming in faster, and take action on balances that slide past their due dates.
5.Get creative with your inventory
Many industries are experiencing supply chain disruptions these days, so it’s more vital than ever to know what you have in stock. Increasing the frequency of your inventory counts could help you understand what materials are running low so you can quickly reorder (and maybe order more than usual).
At the same time, get an understanding of what’s moving and what’s not. Customer needs have changed dramatically at this time, so even if you’re running low in one area, if the demand isn’t there, it’s worth focusing on materials that are currently more sought after.
Then, get creative. There have been stories of breweries and perfumeries pivoting to create hand sanitizer, and clothing companies making masks and other PPE gear. Consider how you may be able to business in ways you might never have considered before.
6.Explore government assistance1
During this pandemic, the federal and provincial governments have highlighted the need to support businesses in Canada. Recognizing that businesses like yours are the lifeblood of the country, the government has developed a number of initiatives designed to help owners keep the lights on.
Here are a few of the relief programs:
Canada Emergency Business Account (CEBA):
The CEBA provides interest-free loans of $40,000 to eligible small businesses and not-for-profits to help cover their operating costs while their revenues have been temporarily reduced.To qualify, you currently need to demonstrate your business or not-for-profit paid between $20,000 and $1.5 million in total payroll in 2019, and the program requirements continue to evolve. You can apply through your bank or credit union.
Canada Emergency Wage Subsidy (CEWS):
The CEWS generally covers 75% of an employee’s wages – up to $847 per week – for eligible employers of all sizes and across all sectors who have suffered a drop in gross revenues of at least 15% in March, and 30% in April and May.
The program is in place for a 12-week period, from March 15 to June 6, 2020.
Register for Direct Deposit through your bank or CRA's MyBusiness account to receive your funds faster and have immediate access to your money (i.e. there are no holds on funds).
The BDC Co-Lending Program:
The BDC Co-Lending program is designed to support eligible Canadian businesses of all sizes that have been negatively impacted by COVID-19. Eligible applicants can access funding up to $6.25 million CAD (maximum loan amounts dependent on business size) to cover operating expenses (such as rent, payroll and other operating expenses) and working capital needs.
The EDC Business Credit Availability Program (BCAP) Guarantee:
The Government of Canada announced the availability of the Export Development Canada (EDC) BCAP Guarantee help eligible Canadian businesses affected by COVID-19. Eligible applicants can access up to $6.25 million CAD in short-term liquidity to cover expenses that are critical to business continuity such as rent, payroll and other operational costs.
The importance of cash flow has never been in question. Positive cash flow is essential to the current and future success of your business.
While the way in which you do business may have changed – at least in the short-term – the life you have breathed into your business is still there. To move forward out of this crisis, it’s important to assess where you stand and implement and/or adjust cash flow strategies that are unique to this moment in time.
As you do, it’s critical you have the right information at all times – from your balances to your outstandings, payables to inventory. Also, be sure to stay up to date on government relief programs, as they have continued to evolve with the needs of Canadians.
And keep your eyes open. Often in times of crisis, opportunities present themselves in new and unexpected ways.
1. While information presented here is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. If you have further questions about any of these programs please consult the applicable government websites or, if you are an RBC business client, speak to an RBC advisor by booking an online appointment at https://www.rbcroyalbank.com/book-an-appointment/book-an-appointment.html.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.