Improve Cash Flow in a Crisis

Tip of the Week – April 28, 2020

Alberta businesses are facing incredible challenges right now with the virus panic, the lockdown economy, and the depressed oil price.

Other than staying alive and healthy, cash flow is the biggest priority for business owners right now.

This week we’d like to share some ideas about protective measures you can take to support your company’s cash flow.

Remember: all things being equal, a dollar now is better than a dollar later. 

Focus on the near-term and budget your cash requirements for next three months. 

Receivables create revenue but that ties up much-needed cash! Evaluate the standing of your customers. If a customer has a lot of aged AR, ask them to clear it up before new orders can be shipped out. If you are able to process a credit card payments over the phone, that can be a good way to collect very quickly with just one call. You can also come up with new terms as appropriate. For example, you might do some orders on a purely COD basis or you might provide discounts for early payment.  

The longer you take to settle your payables, the more cash you can free up. At the same time, you don’t want to frustrate your vendors. Work out payment arrangements with suppliers. If you’re generally a reliable customer, many will be happy to accommodate you, especially if their own cash position is relatively strong. Vendors can often be a more favorable source of financing than the bank. 

Many vendors are going to be in the same situation you’re in — they’re tight on cash. Try to negotiate discounts — this can be a win-win for everyone if you get a discount and your supplier gets money sooner than they would otherwise. 

The first is the Defensive Interval Ratio. This looks at how long you can pay your expenses from your existing liquid assets (mainly cash and receivables) without any new cash flow.

Defensive Internal Ratio = Current Assets / Daily Operating Expenses

To calculate Current Assets:
Cash + Liquid Marketable Investments, if any + Receivables

Next is the Cash Conversion Cycle. This measures the time between cash going out and coming into the company. Many manufacturing companies watch this closely but it’s applicable for other businesses.

Cash Conversion Cycle = (Days Sales Outstanding + Days Inventory Outstanding) – Days Payables Outstanding

To calculate Days Sales Outstanding:
Average Accounts Receivable / Total Credit Sales x Number of Days

To calculate Days Inventory Outstanding:
Average Inventory / Cost of Goods Sold x Number of Days

To calculate Days Payables Outstanding:
Average Accounts Payable / Cost of Goods Sold x Number of Days

If you have any questions about financial modeling and cash flow management, please contact us any time.

See below for some other resources you might enjoy:

The Death of U.S. Oil?
A lot of US oil production was uneconomical even before the oil price crash. Is this the Day of Reckoning?


Quebec Is Reopening Its Economy
Let’s all hope they succeed.


An Easy Way to Reduce Some Stress
This might sound hokey, but we found an interesting smartphone app that helps develop breathing techniques to reduce stress. It actually works pretty well and can help you every day.

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