Managing Cash Flow In Uncertain Times Part 1: Cash Flow Analysis

Managing Cash Flow In Uncertain Times Part 1: Cash Flow Analysis

Managing Cash Flow In Uncertain Times Part 1: Cash Flow Analysis

Are you asking how long you can sustain your business under current conditions? There’s no question that it’s uncertain when things will return to normal (or some new version of “normal”).  One of the biggest issues when it comes to sustainability is cash flow. This blog series outlines how to analyze and improve your business cash flow, even during uncertain times. In part 1 below, we dive into cash flow analysis.

Part 1: Cash Flow Analysis
Part 2: Accounts Receivable
Part 3: Accounts Payable
Part 4: Additional Cash/Credit Options

Getting Started

In order to take control of your cash flow during the pandemic, it is imperative to have accurate, up-to-date information on which to base your decisions. 

  • Do you have an internal or external bookkeeper who uses standard accounting software? This is where you want to start. 
  • Inquire about the timeliness of the data – are all transactions recorded up to a given point (ideally through the end of the previous month) and are the bank and credit card accounts reconciled? 
  • Request a balance sheet, profit and loss statement, accounts receivable aging (if applicable), and an accounts payable aging (if applicable). 
  • The next step in the cash flow analysis will be identifying cash on hand.

Cash on Hand

Your cash on hand is your bank balance less any outstanding checks and payments. For example, if you’re looking at your bank balance as of April 30th but your rent check hasn’t yet cleared, make sure you deduct that from your available cash balance. When analyzing cash on hand, be sure to look at all of your cash accounts – checking, savings, money market, etc.  The next step is to review your income sources.

Income Sources 

Generally, when we think of income, we think of money earned. In this analysis, we will also look at the money available. Is your business generating income whether by normal business operations or a modified business plan? For example, many restaurants have not only shifted to take-out only but have begun offering grocery pick up/delivery as well. Next, look at cash available to you. This may come from many different sources. One source is government assistance through the Paycheck Protection Plan or the Economic Injury Disaster Loan. (More information on these programs can be found on the Numberwise COVID Resources Page). Also, consider any lines of credit that you have available to you.

Expenses 

The next step is to look at your expenses. For most businesses, the largest expense is payroll.  Depending on the nature of your business, you may have had to let some or all of your staff go.  When doing this analysis, you’ll want to look forward and consider the number of employees you may need when things return to a modified normal. The rent or mortgage payment is usually the next highest expense. Have you reached out to your landlord or mortgage company to see what payment deferral options are available? If you’ve agreed on paying half of the monthly rent for the next three months, be sure to factor that amount into your expenses along with the full rent amount after the deferral period is over.  Other common expenses are utilities, software costs, and insurance. To determine your fixed costs, refer to the profit and loss statement.  

Burn Rate 

Now that you’ve determined your cash on hand, available cash, and expenditures, you can come up with a cash flow forecast and calculate your burn rate.  The burn rate is a calculation of how fast cash is being spent.  It is essentially your expenses over a given period of time.  From this, you can determine how long your cash can last.  For example, if you’re spending $50,000 per month and you have $150,000 of cash available, you have three months of cash on hand.

Summary

In summary, the first step to managing cash flow in uncertain times is to be informed in your planning and decision making by:

1. Having accurate financial information

  • Utilize accounting software like Xero
  • Ensure you have accurate profit and loss statements
  • Conduct regular reconciliations
  • Outsource your bookkeeping if needed

2. Determining expenses and cash available

  • Identify all expenses (and we mean ALL of them) 
  • Identify all income sources 
  • Calculate cash flow based on the above 
  • Calculate Burn Rate to determine how long your cash will last

3. Staying up-to-date on resources available for businesses – the Numberwise Blog and our COVID-19 Resources page are two places to do this during the pandemic

Stay tuned for Part 2 of the “Managing Cash Flow in Uncertain Times” blog series focusing on accounts receivable.

Check out our COVID-19 resource page for more blog posts, videos and helpful information for businesses during the Coronavirus pandemic.

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