Managing the finances of businesses during “normal” trading conditions itself proves to be challenging, now having to do it during the COVID pandemic takes it to another level altogether.
By Alois Sajanga
As the saying goes “Cash is King” and this is now truer than ever as we live through this unprecedented time. Thus, managing your business cash flow will enable you to navigate the crisis and ensure that your business survives through and beyond the COVID-19 crisis.
Let us look at some of the techniques that can be applied in assisting you through this daunting process:
- Know where you stand – get your books UpToDate
Whether you have put your business on the back burner waiting for the crisis to be over (temporarily closed), managing it remotely or something in-between, you will need to get a handle on your cash flows in order to ensure the survivability and success of your business. It will be very difficult to begin to navigate and certainly impossible to get visibility of where you are heading, if you don’t know where you are at in terms of cash flow and if your books or records are incomplete or not accurate and UpToDate. So let’s get organized…
- Do an Internal Audit or Take Stock of what you have:
- Assets – what do you own, cash in the bank, inventory, property, equipment, etc.
- Liabilities – what you owe, unpaid invoices, loans, etc
Remember, that cash in bank and lines of credit such as bank overdraft, will assist you in alleviating short term cash flow issues or the rainy days quickly.
If your Assets are more than your liabilities, you are in as “net asset” position or financially healthy. However, if your liabilities are more than your assets, then you are in a “net liability” position or technically insolvent – this should give you a strong indication that something or things need to change quickly.
- Spring cleaning:
Doing the necessary clean up work now, will avoid you from having all the sleepless nights around your year end or tax submission deadlines.
- Avoid being snowed under in terms of keeping track or records and paperwork, etc and opt for digital cloud-based bookkeeping or accounting solution. This will give you access to your documents, records and books at your fingertips from anywhere in the world.
- Logically and chronologically arrange your transactions – this will ensure that you know where you money is coming in from (Sources of revenue or income) and what you are spending them on (expenditures) and thus will also assist in eliminating some of the wasteful or unnecessary expenses.
- Double check your stock, this will ensure that any discrepancies or leakages will be identified and fixed, thereby avoiding a major problem down the line.
- File your taxes – as you are aware you are required to file your income tax return within 12 months after your financial year end. If all your books and records are up to date, you can file soon after your year end and if a refund is due to you from SARS, you will be able to get it quickly.
- Prepare Financial Statements and Management Accounts
Financial Statements and Management Accounts is the story book of your business, it collates all your transactions and records over a period (generally monthly or 12 months for the financial year) and gives you a comprehensive snapshot or aggregated view of your business’s financial health.
There are 3 primary statements which aids in giving a complete picture of the business:
- Statement of Comprehensive Income (Profit and Loss Statement) – It gives you your income, expenses and profit or loss for the period. This statement will aid you in controlling costs or looking at ways to optimize or improve revenue generation and in turn profitability.
- Statement of Financial Position (Balance Sheet) – This statement tells you how much your business is worth. It’s a position at a point in time i.e. on a specific date how much assets you have, how much liabilities you have and what is left (net worth)
- Cash Flow Statement – it gives you an indication of how much cash is flowing in and how much cash is flowing out of your business. The goal or aim here is to ensure that the amount of cash flowing into the business (cash generated) is more than the cash flowing out of the business (cash burn). Remember cash is king!
Doing A, B and C above will give you a clear indication of where you are at. The below steps will now provide you an indication or outlook of where you could potentially be heading and making adjustments timeously.
- Forecasts
- Doing timely and accurate forecasts i.e. how much revenue you expecting to generate over the next 3 months, 6 months, etc and what expenses you will be incurring over the period, will give you an indication of your expected profit.
- A cash flow forecast, will allow you to see what you expecting to generate and pay out over the period as well and this will give you an indication of whether you will be able to afford or need to borrow money.
- The forecast should be done using 3 scenarios in order to stress test your assumptions i.e. Best Case Scenario (Optimistic), Base Case Scenario (Most Likely), and Worst Case Scenario (Pessimistic)
Doing, these forecasts will enable one to take business decisions i.e. invest in new products, etc i.e. if spare cash will be available or approach a financial institution for assistance in terms of a loan or line of credit.
The profitability forecast will aid you in calculating your provisional tax payments to be made to SARS hassle free
- Preserve Cash
It is more important now during the pandemic to look at ways to increase your cash reserves in order to seize opportunities when they arise quickly. Thus, you need to look at ways to increase cash inflow or reduction of expenditure (cash outflows). A few ways to do this:
- Look for business efficiencies i.e. automate processes that are manual or time consuming
- Negotiate rental breaks from landlord or reduce space by having staff work from home and hot desks in the office or sublet unused space to generate another stream of income/cash inflow
- Move away from retainer-based agreements to pay as you use options
- Use cloud based servers, etc thus reduce the need for physical hardware and insurance, etc that goes with it
- Take up relief provided by government i.e. Reduced pay claim short pay from UIF, low interest loans for businesses impacted by Covid
- Offer early settlement discounts on your outstanding debtors to try and convert them to cash as quickly as possible, thereby reducing the risk of bad debts
- Negotiate longer payment terms with suppliers, if you are cash strapped or early settlement discounts if you have the cash to pay
Everyone’s sensitive to the impact COVID-19 is causing, and you’ll be surprised how generous some of your contacts can be. Your vendors, suppliers, and partners need businesses like yours to survive, and they’ll do their part to accommodate your needs. Especially if you have a longstanding relationship and your payment history is credible.
And remember that your clients and debtors are in a similar situation as you (maybe worse, maybe better) — so listen to their needs as well. Odds are, you can come up with some sort of compromise that works for both parties.
Find a Professional
You should probably consult a professional accountant or bookkeeper before you make any major decisions. They can provide smart advice for your unique circumstances while helping you navigate the COVID-19 crisis strategically.
Don’t know where to find one? Bestcount Accountants can help.
A Final Thought on Managing Finances
When it comes to the nitty-gritty of managing your finances, it’s important to remember — this is something you cannot just set and forget. As your financial situation evolves, which it inevitably will, you want to update your statements and forecasts so you can adjust your plans and budget accordingly.
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