The 3 Cash Basics
To keep your business solvent through the COVID-19 pandemic, refocus on these cash basics:
- Now is better than later. Decreasing cash flow for many of your customers means you’ll likely have trouble collecting 100% of your accounts receivable in the short term. But don’t overlook clients whose cash flow or revenue has yet to be dramatically affected by the pandemic or who have a big enough emergency fund to pay most of their bills for several months.What to do now: Be compassionate, but don’t stop your A/R collection efforts. You need as much cash as possible now, not later. You likely have some customers who can still pay your invoices.
- More is better than less. It is important to build your cash reserves now more than ever. While difficult during lockdowns, think long-term to build up your cash. Review every asset on your balance sheet – accounts receivable, prepaid expenses, fixed assets, and inventory. Determine what it would take to convert each of them to cash.What to do now: Consider leveraging these assets with your bank as a line of credit. Also talk to your lenders about the need or option to postpone several months of loan payments.
- Don’t run out. According to a 2019 survey by The Service Corps of Retired Executives, 82% of small businesses that eventually fail do so because they run out of money. If things take a dramatic turn for the worse, this is the ultimate rule for your business: Don’t run out of cash. Forecast your business’s worst-case scenario and figure out how much cash you need to keep your doors open.What to do now: Prioritize your business’s expenses, starting with the first expenditure you can cut from your income statement to increase your cash position.
The 3 cash basics seem obvious, but they are difficult to put into practice. By keeping these ideas top of mind, you should be able to meet your goal: Have enough cash to keep your doors open and business solvent.