How to manage your cash flow during Covid-19
The Covid-19 pandemic has completely transformed the global economic landscape since the first case was discovered late last year. It has brought many economies to a near-standstill with governments imposing all manners of lock down in a desperate bid to contain the spread of the virus. Under such an uncertain business climate, it is more important than ever for small business owners to tighten their purse strings and manage their cash flows to survive this unprecedented crisis.
Profitability does not equate healthy cash flow
It is important to understand that profitability does not equate healthy cash flow. A profitable company who fails to implement proper cash flow management policies may find itself on the brink of bankruptcy when an unexpected crisis happens, such as Covid-19.
What is cash flow management?
According to Susan Ward, writer for The Balance, Cash flow management is the process of analyzing, monitoring and optimizing the net amount of cash receipts after deducting cash expenses. The net cash flow of any business is a critical indicator of its finaincial health.(Follow her on Twitter here).
Components of good cash flow management
Active monitoring of cash flows to facilitate cash flow budgeting and forecasting
Automating cash flow forecasting and budgeting process to reduce error and improve employee productivity
Rainy day fund; a rule of thumb is to always maintain liquid funds equivalent to 3 to 6 months of operating expenses
Strategies to automate and speed up billing and collection to shorten the cash conversion cycle
Appropriate use of credit for working capital and long-term investment
Investment of surplus funds for alternative sources of passive income
How to implement cash flow management policies
Data quality is key to managing cash flow. In order to budget and forecast cash flows accurately, it is important to invest in an accounting system that is able to generate accurate financial reports for cash flow analysis. Many small business owners are now switching to cloud accounting software with user-friendly financial reporting functions to harness the power of digital technology to better manage their businesses. Many are utilizing the invoicing function of cloud accounting software to electronically send sales invoices to customers to speed up billing and collection and to shorten their cash conversion cycle. Read more about navigating Covid-19 with cloud accounting here.
Speak to your accountant
We understand that the process of implementing cash flow management policies can be daunting at times. If you have any queries, feel free to drop us a message or email us and let us know how we can assist you. Our general response time is one business day.
