One of the hardest parts of owning a business is working out ways to preserve cash when crisis strikes. With COVID-19, businesses are having to move work to remote solutions, or close offices to comply with social distancing. Our team has worked out some 9 ways to preserve cash in a crisis.
1. Up to date financial information
Keeping your financial statements up to date is critical in turbulent times. Accurate, timely financials are necessary to forecast what your true cash needs will be.
You may find that you will need to borrow money for short-term operating cash flow. Lenders must have financials before considering a loan. Don’t risk finding yourself in a position where your accounting has fallen behind. You don’t want to scramble to catch up in an emergency.
2. Slow down payments to vendors
Renegotiate payment terms with vendors. Ask lenders for a temporary suspension of loan payments. Ask landlords for extensions of rent payments.
It’s best to be upfront and honest with them about the need to extend the payment terms. Explain your hardship. Resist the urge to simply not pay without explanation.
3. Freeze non-essential spending and cut expenses
Take time to do a thorough review of your spending patterns. Review your current budget. What types of expenses can be delayed? What can be cut entirely?
It is crucial to determine what is essential to operate the business and focus on those uses of cash.
4. Speed up customer payments
There are a few ways to do this:
- Review older accounts receivables, those over 60 or 90 days. Offer to write off part of the amount due if your customer will pay the balance quickly, say 7 days or even immediately.
- As you issue new invoices, offer cash discounts for early payment. For example, offer a 2% discount if your customer pays in 10 days from the invoice date.
- Ask for electronic payments, to cut check clearing time.
- Ask for down payments on new orders.
- Invoice more often. For example, if you invoice monthly for services, move to a bi-monthly schedule.
5. Reduce inventories
Adopt a “just-in-time” inventory ordering system. This means inventory items are received only as needed in the production process. This reduces the time your cash is tied up in inventory that is sitting on your shelves.
Sell off “dead”, old and slow-moving inventories items at deep discounts. While you may take a loss on those items, you will generate some cash.
6. Sell non-critical assets
Take an inventory of assets not utilized or no longer needed. Sell them to generate cash.
7. If you’re a non-profit organization…
Borrow from permanent endowments. In dire circumstances, your Board of Directors can approve the release of permanent endowment funds.
When it seems doubtful that temporary restrictions will be met, request a release of the restriction from the donor.
8. Explore financing options
Some sources are:
- Working capital credit line from your bank.
- Asset-based loans from your bank.
- Small Business Administration loans.
- Industry organizations that provide short-term loans.
- For Minnesota non-profits, contact Propel for Nonprofits. They offer short-term lending and lines of credit.
- Personal loans from owners and family members. Vendors and other parties with a stake in the business may be willing to help.
9. Reducing payroll and benefit costs
These measures are emotionally difficult. In severe circumstances, these actions will reduce costs.
- Reduce weekly work hours. For example, adjusting full-time staff from 40 to 35 hours.
- Ask employees to take voluntary furloughs or pay reductions.
- Change holidays from paid to unpaid.
- Reduce the company’s benefit costs. For example, reduce or eliminate 401k matches and/or the employer’s contribution to health coverage.
- Replace some or all wages with performance-based pay. For example, commissions, incentives tied to profitability, etc.
- For non-profit organizations, become a “reimbursing” employer for unemployment and eliminate the unemployment tax.
All In One Accounting has prepared a free simple guide that can be used and built upon to be more business-specific. Download a free copy of our guide HERE.
At All In One Accounting, we take businesses from financial chaos to business clarity and beyond. Our elite team of Accountants, Controllers, and CFOs are ready to help you in these uncertain times. Visit our website here for a free consultation with one of our accounting professionals.