17th March, 2020

Best practice cash flow management for businesses impacted by COVID-19

The novel coronavirus COVID-19 is causing businesses around the world to experience major falls in demand for their products and services, as well as labour shortages and supply chain disruptions. In this article, chartered accountant Joe Kaleb offers his tips on crisis cash flow management.

Cash flow management needs to be an integral element of the overall COVID-19 risk assessment and action planning for businesses already impacted and likely to be impacted by COVID-19.

At this stage, nobody has a complete picture for what coronavirus means for the economy, but we can at least expect significant disruption to the tourism, aviation, hospitality and performing arts sectors, and potentially many more.

If you’re a business owner preparing to be impacted by the effects of coronavirus, here’s some straightforward advice on what to look at in your cash flow management plans to help give you the best chance of riding out the pandemic.

READ: An accountant’s advice on how to protect your business from coronavirus

1. Review and adjust cash flow budgets

In these challenging times, you need to know well in advance what impact a slowdown will have on the cash flow of the business.

You should be reviewing and regularly adjusting your cash flow forecasts to determine what affect a reduction in revenue will have on your ability to pay suppliers and repay debt.

For business owners in Australia, we have a simple cash flow calculator available that can be useful for this purpose should you not have online accounting software that can handle this for you.

READ: Cash flow statements: Preparation, examples and a template

2. Review capital expenditure

Given the uncertainty over COVID-19, business owners should carefully consider any investments in capital equipment until the current situation improves.

Some businesses may take this opportunity to invest in new machinery to position for the rebound and to create a competitive advantage in the future.

As part of its COVID-19 stimulus package , the Australian Government has provided an incentive for businesses to invest in capital equipment by increasing the instant asset deduction threshold to $150,000 and raising the turnover threshold to $500 million. This new concession applies to new or second-hand assets first used or installed ready for use by 30 June 2020.

Recently, New Zealand’s Ardern Government announced its own measures, including wage subsidies for businesses impacted by COVID-19. NZ-based business owners should spend some time getting up to speed with what’s on offer, and how you can go about accessing support if eligible.

READ: Capital expenditure: a guide for businesses

3. Assess financing options

Business owners should not assume that their current financing facilities and other financing options previously available will continue to be available in the future.

Take this opportunity to actively engage with your bank or financier to ensure your existing lines of credit remain available, and to explore new or additional options should they be required.

For example, you may need to consider factoring to generate faster cash flow from your receivables.

4. Timely financial reporting

Ensure that your financials are kept up-to-date so that you monitor profitability, overheads, stock levels, and debtors and creditors balances on a timely basis.

MYOB’s online accounting software has all the features you need and solutions for every stage of your business, including automated invoice reminders, customisable invoice templates and all the reporting you need to accurately track cash flow and more.

5. Cutting overheads

Business owners should review their Profit & Loss statement and look for savings that can be generated by cutting discretionary overheads such as advertising and consumables.

Where labour is a significant cost line in your business, consider ways of reducing staff wages to avoid layoffs.

For example, consider reducing contract labour and redistributing work to permanent staff. Also, you might offer reduced working hours where allowed under a particular industry Award, or encourage staff to take available leave or leave without pay to preserve cash flow.

NB: Be cautious when considering cuts to payroll and be sure to check what employer subsidies are available to you before making a decision. If you can maintain the headcount, it will pay dividends once normal trade conditions return.

6. Inventory management

With many businesses experiencing supply chain disruptions due to shortages in raw material and component parts, explore alternative supply chains with a view to increasing strategic stock levels as a buffer against the potential impact of a prolonged or much broader supply chain disruption.

Take steps to increase sales of slow moving or perishable stock to generate more cash.

Want to track your stock in real-time? Discover how with MYOB’s inventory management module.

7. Debtors management

Now is not the time to let your debtors off the hook, so contact your clients and customers to encourage them to pay early. You can incentivise them by offering discounts, within reason.

Where customers themselves are experiencing cash flow difficulties, you might consider negotiating periodic payments. You’ll just want to make sure they’re enforced.

Then, take a look at how your bookkeeping and admin processes might need to be updated to accommodate the following:

  • Invoicing as soon as the product or service is delivered
  • Regularly reviews of aged debtor reports and following up with slow paying customers
  • Regular reviews of contracts with customers to determine when they can cancel orders and, if necessary, updating those contracts to limit the ability of customers to cancel orders

8. Creditors management

Options to manage your debts may be limited, but if you’re being impacted by the knock-on effects of coronavirus, you should take whatever steps you can to negotiate with creditors, as they may be in a position to help in some way.

Broadly speaking, you have three options to consider pursuing:

  1. Contact your suppliers and seek payment extensions
  2. Review your supply contracts to determine if you can cancel orders, or at least delay delivery
  3. Contact your landlord and ask for payment extensions, possible rent reductions or variations to the lease

9. Consider alternative revenue streams

Where your business is experiencing declines in continued revenue streams, consider alternative ways to generate that income stream. For example, many retailers who are experiencing a downturn in passing trade are ramping up their online marketing strategy to attract new customers.

If your primary markets are international, consider ways to increase sales locally, especially if your stock is perishable.

10. Keep on top of tax obligations

It’s important that your tax obligations, including any special considerations for payroll and so on are paid correctly and on time.

In Australia, this may mean becoming more familiar with STP legislation or simply keeping your BAS payments up-to-date. In NZ, you’d be looking at Payday Filing or checking employee leave entitlements.

And if you’re unable to pay on time, enter into payment plans with the ATO for tax and BAS (Australia-only) or, in New Zealand, you’ll need to seek advice from the IRD.

For example, in Australia the ATO has announced support measures for businesses impacted by COVID-19, which includes payment deferrals, changing quarterly GST reporting cycle to monthly reporting to get quicker access to GST refunds, and varying PAYG quarterly tax instalments.

11. Take advantage of government support

Governments across the world, including Australia and New Zealand, have announced stimulus measures to support businesses during this crisis.

READ: COVID-19 stimulus for businesses in Australia and New Zealand

The stimulus is in the form of subsidies and tax breaks to keep businesses open and people in jobs.

The best way to stay informed of the various stimulus packages across Australian and New Zealand tax jurisdictions is to follow the MYOB blog, as well as heading straight to the source at the ATO and IRD websites.

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This article, while written by accredited tax agent and chartered accountant Joe Kaleb of Australianbiz, does not constitute financial advice. For advice on your specific situation, MYOB recommends engaging a qualified professional directly.