Managing Cashflow & Working Capital During Covid

Managing Cashflow & Working Capital During Covid

Australia seems to have coped with the economic effects of Covid better than some other countries, but small businesses will still have a long haul to get back to where they were.

This is especially true of some industries like the hospitality and tourism industries which suffer from a lack of demand, and the agricultural industries suffering from lack of supply (labour).

Other industries may have fared better and are probably starting to look at new strategies and even opportunistically looking at merging or acquisition of another business.

Whatever their situation there will soon be a need for more capital in Australian small businesses, and the need to manage cash flow and working capital.

In this blog post, I will look at short-term cash and liquidity initiatives as well as cash flow forecasting.

But before we start, I'd like to invite you to take a look at our revamped website at otsmanagement.com.au where we have clarified our focus on our two areas of service.

Please take a look and explore our special focus areas of Small Business Advisory services and Managing Indigenous Organisations. We specialise in only these two client sectors and we invite you to take a look at what we can offer.

Short-Term Cash & Liquidity Initiatives

There are five short-term actions that you can take right now that will have an immediate effect on your cash flow:

  1. Report on key cash indicators in your business
  2. Develop a strong cash focus in your business
  3. Identify alternative initiatives
  4. Pull levers from your balance sheet and profit & loss
  5. Plan for longer-term recovery

Report on key cash indicators in your business

There are three cash flow measurements you should start to report on and study:

  1. Cash flow - what cash is generated or expended in a week/month/quarter?
  2. Cash flow versus Profit - where is the cash generated from profit?
  3. Cash flow forecast accuracy - how accurate is your cash flow forecast looking ahead a week/month/quarter?

You need to calculate your cash flow in short periods. From your cash accounts, report on and understand how much cash you generate in a given period.

This is simply, cash in from all sources less cash out to various expenditures and capital payments. When calculating this don't forget to include cash drawn by yourself as owner's salaries or drawings - if this is impacting your cash flow, you need to know about it.

This information gives you an indication of how much cash is generated (or spent) in a given period so that you can make plans or, go on to identify alternative initiatives or pull different levers to increase cash flow or reduce expenditure.

Once you are clear what your weekly, monthly and quarterly cash flow is, you should compare that with your profit for those periods.

Often, small business owners complain that their accountant is reporting healthy profits, but they just don't seem to get to see the cash.

Comparing your Profit & Loss report to your cash flow will show you where the cash is getting "stuck".

For example, your profit includes all sales in the period.

However, if your customers take a long time to pay you, the cash from sales will be "stuck" in accounts receivable. Hence your profit, after including all those sales will look good, but your cash flow, not including all those accounts receivable will look bad.

There are other reasons for the discrepancy between Profit and cash flow. Perhaps you are investing in too much stock or old stock that you have paid cash out for - the stock shows in your profit but the cash is "stuck" in inventory.

Understanding why your cash flow is different from your profit will allow you to identify more levers that can be pulled.

Get to know how many days of cash from sales are held up in accounts receivable.

How many days of cash is held up in inventory?

How many days does it take to pay your suppliers?

All this is an indication of your typical cash conversion cycle (how many days between cash in and cash out) and give you ideas about what can be changed.

Of course, all this information may be wrong or wrongly applied if your cash flow forecasting is inaccurate. So, an important task is to check from time to time how accurate your cash flow forecasting is, why it is inaccurate, and fix it.

Moving ahead, you need to know that you can forecast cash flow fairly accurately over the next few months.

Develop a strong cash focus in your business

While you are getting to grips with your cash flow data, you need to make sure that everyone in your business is looking at cash as king, and in the same way.

There's no point in doing that analysis above and finding that your partner or staff are not focused on cash and still allow customers to take too long to pay, or not taking advantage of supplier discounts, or not paying attention to the old, slow-moving stock.

You need everyone's help in your business to focus on cash.

So set the focus yourself - make sure cash is talked about in every internal meeting and make sure you tell everyone about the importance of cash in the business.

As you report on and discover your measurements from reporting on key cash indicators, explain it to people in the business - make the key cash indicators part of the vocabulary as you regularly discuss "days in debtors" or "days in stock". Ensure the basics are known and understood.

If your relationships are strong enough in the business, make accountability part of the conversation. Ask salespeople to be accountable to "healthy" customer balances; have your bookkeeper accountable for the accuracy of forecasts; measure ordering staff on their ability to get the best terms for purchases. Align people's Key Performance Indicators to the cash flow metrics.

Identify alternative initiatives

With accurate information, you can start to look at different scenarios. Ask yourself what your cash flow information can tell you about your possible performance if the Covid situation improves, stays the same and if it worsens.

Say we open up as envisaged and people start to travel across borders, and perhaps if your business is affected, we start to get international visitors. What will happen to income, working capital requirements, and expenditure? How will your cash flow forecast be affected?

Then, look at your situation remaining the same as it is now, or at best a very slow recovery. How will that affect your cash flow forecast?

Finally, assume that there's a second or third or fourth wave of the virus - what will happen to shutdowns and therefore your cash flow forecast?

In looking at these three scenarios, you should then be able to identify your working capital and cash requirements in each of the three scenarios - and prepare yourself accordingly.

Pull levers from your balance sheet and Profit & Loss

All this means is that having understood what might change and how your financial information is affected, you can start to identify specific things you can do to your balance sheet and Profit & Loss to improve cash flow:

  • Look to reduce days in inventory - put on sales for the old stock moving inventory to cash, increase upsell offers, better marketing, implement a just in time order system
  • Look to reduce days in accounts receivable - follow up all customers within strictly set times, offer early payment discounts, investigate debtor finance/funding, provide credit card payments
  • Look to increase days in accounts payable - negotiate early payment discounts and better purchase prices, take advantage of finance offered by suppliers, implement just in time purchasing
  • Look to reduce unnecessary expenses, especially one-off and non-essential costs
  • Look to increase sales or the value of sales (you can increase the number of customers, increase your prices, or increase the frequency of sales)
  • Look at which products in your range will receiver faster post-Covid
  • Look to improve margins (price, volume and type of product mix)
  • Look to open up new revenue streams (the sit-down restaurant that now offers home delivery)
  • Look to fully utilise government support and incentive packages
  • Look at the right-sized workforce and manage workforce costs (more shared jobs, reduction in numbers)

Plan for longer-term recovery

Now that you have the accurate information, the cash-is-king culture in the business, the results of pulling several levers, and the understanding of the three possible scenarios, it's time to look further ahead.

We should, despite our current concerns, plan to be here for the long-term. So, plan accordingly.

If you are still in crisis mode, then plan for survival over the longer-term.

Maintain your accurate cash flow forecasting, down to a weekly or daily basis if necessary. Keep investigating the different scenarios and watch what is happening in the world as to which scenario is most likely for you.

Reduce your cost base by selling unnecessary assets, plant and equipment, converting their value to cash.

Ensure you are continuing to maintain communications with your suppliers, banks and customers.

Source different working capital funding options.

If you have moved to the recovery phase, your longer-term focus should be on remobilising your efforts. Start to increase marketing and reinvigorate sales. Reconsider your workforce requirements and how you can increase this in stages.

Calculate and reset ongoing working capital requirements and improve returns on capital across all areas.

If you have moved beyond and into normalisation, then your longer-term focus should be on seeking opportunities.

It may be time to take a more strategic approach to reset your long-term direction. What is your new value proposition in this market?

This is the phase when you should also look at reviewing and restructuring debt and your supply and supplier chain to the maximum cash flow efficiency. Your working capital should be capable fo stabilising your business.

If you are lucky enough to have moved toward sustainability again, then make sure you remain agile. Continue your scenario analysis and keep in touch with what's happening more broadly so that you can return to more defensive positions quickly.

Continue to monitor business and cash flow risk and make plans to improve business and cash flow performance. Take a check on your strategic direction and new financial metrics. Start to look at raising capital for the future.


If you follow these five short-term cash and liquidity initiatives, you should be making changes to your business that will provide more cash flow, and also preparing yourself for the unpredictability of the virus, as well as looking to plan ahead to survive and normalise.

If you want to understand what financial ratios mean, as you calculate your key cash indicators, you can read about them from this blog post here.

If you would like some help in implementing any of these initiatives, or would just like to talk more generally about your business, please click on the "Contact Us" link, or simply call 08 9242 2085 and have a chat.

And don't forget, you can download our free eBook about business success called "Business Isn't Just Numbers" and you can subscribe to these blog posts to be sent directly to your inbox.

Comments are closed.

OTS Management