As the unprecedented effects of the coronavirus pandemic continue to be felt across the UK, businesses of all sizes are facing cash flow crises. This is partly thanks to a significant decline in spending across the country, as well as disruption to operations as a result of public health measures to contain the virus.
The Bank of England estimates that British companies could face a total cash flow deficit of £140 billion from the second quarter of 2020 to Q1 2021, just from efforts to maintain their current staff, buildings and equipment.
Whilst Government measures such as the Coronavirus Job Retention Scheme (CJRS) help to cover some of these costs, as the pandemic continues this is an ongoing concern for many businesses.
Cash Flow Forecast Or Severe Weather Warning?
Cash flow forecasts are a standard stage of business development, most often used to make important business decisions or secure investment or financing. When preparing for the fallout from a recession, cash flow analysis is more important than ever, serving as a sort of ‘severe weather warning’ system to alert you to potential future problems.
It is useful to prepare a forecast that predicts the issues that you are likely to come up against over the coming months. During an economic downturn, it is common for customers to fall behind on payments, and for suppliers to become stricter about their own payment terms.
As a business, you must predict and prepare for these eventualities, and have procedures in place to deal with them. You will need to think about the likelihood of slower sales, meaning that you won’t need to have as much stock. You might choose to spend more on advertising or promotions in order to counteract your customers’ reluctance to spend money.
All of these choices should be plotted and the financial means to carry them out accounted for in your forecast to protect your business for the months to come.
Tips To Maintain A Healthy Cash Flow
Calculate Your Break-Even Point
Whilst it is natural to focus on profits and business growth, this is only really possible during times of economic strength. Instead, now is the time to determine your break-even point and strive for this.
Your break-even point refers to the point at which your fixed and variable costs are matched by your sales, allowing the ongoing operation of your company.
To calculate your own break-even point in units you can use the formula:
break-even point (units) = fixed costs ÷ (sales price per unit – variable costs per unit)
As an example, say your business produces cereal bars. It costs you 40p to produce one cereal bar, and you are selling them at £1.50 each. Your fixed costs per month, (for labour, production etc) are £2,000.
Fixed costs – £2,000
Variable Costs – £0.40 (per cereal bar produced)
Sales Price – £1.50 (per cereal bar)
Your break-even point for the month would be calculated as follows:
Fixed costs ÷ (sales price per unit – variable costs per unit)
£2000/(£1.50 – £.40)
This means that you need to sell 1,818 cereal bars per month to break even. If you are not able to meet this then you would want to think about cutting costs or producing less cereal bars to keep yourself afloat.
Try Out New Pricing Strategies
Although it may seem counter intuitive to make big changes during a period of uncertainty, many businesses find that these times are the best for testing out new revenue structures (such as gift cards or subscriptions) on their most dedicated customers.
Known as “superconsumers”, your most die-hard customers are your best target group for new pricing structures, as they are already committed to your brand and product, and are thus more likely to buy into a new way of buying that offers them more value.
Subscription services have become increasingly more popular in recent years and, now more than ever, offer companies a way to ensure repeat custom that offers a meaningful discount and ease of future purchase for the consumer.
Subscriptions and gift card purchases allow you to better forecast your income and offer you a source of regular and reliable cash flow, as well as offering elite status and increased value for your members.
Analyse Your Balance Sheets
As mentioned above, your break-even point is important to help you to stay afloat, but this isn’t where cash flow management ends. Using your break-even point you can focus on bringing in extra cash as a cushion for any potential crisis.
Look at your accounts payable and accounts receivable to find any disconnects or potential upcoming issues. If you are concerned that your cash flow is getting a little tight, you can tighten up payment terms or send out payment reminders.
If you are avoiding new products and services for the time being, in order to focus on keeping everything flowing smoothly, you may be doing yourself a disservice. The majority of companies are risk averse when it comes to trying out new things, particularly in times of economic uncertainty, but this can actually be the best time for innovation.
In a situation such as a global pandemic, consumers are grateful for the distraction of a new product or experimental service, and they are likely to be more empathetic if there are imperfections that still need to be worked out.
This does not mean that you should start designing and producing a product from scratch, but making tweaks to your existing product line or moving up the launch date of something already completed could see your cash flow boosted exponentially.
As an example, ESPN moved up the launch of its long-awaited Michael Jordan documentary from June to April this year, securing 23.8 million viewers in Europe alone. In the meantime, Disney delayed the launch of its newest live-action release Mulan for five months before eventually releasing it for streaming in September, missing out on months of pay-per-view revenue.
Even if you are making a profit, it is always a good idea to cut costs where and when you can. Here are some of the ways you could cut costs without even noticing:
Review your property costs. Employees all over the world began to work from home during the countrywide lockdowns earlier this year, but most businesses have brought their teams back into the office now. This is a good time to decide which employees are crucial to your workplace, and who could work just as well from home. A smaller office will be cheaper and have lower running costs, potentially saving you thousands of pounds every year.
Adopt new energy efficiency strategies. A few small changes in your workplace could save you money every month on utility bills. Make sure that lights are only on in the rooms that are being used, or invest in a smart thermostat and you should quickly see a difference.
Adjust postage costs. Whilst sending out items via next day delivery is an advantage for customers, many find that they don’t actually require it when purchasing an item they actually want. Look into cheaper shipping options and compare providers to find an option that is reliable and trustworthy, but doesn’t cost as much.
Cash flow is the lifeblood of any business, and when money gets tight it is natural to panic. Using an accounting service like An Accounting Gem can help to take some of the risk out of making financial decisions, and ensure that you always have a steady flow of income to keep your business afloat.
To find out more, get in touch on 01473 744 700 or email us at firstname.lastname@example.org. We are here to help you every step of the way.