Maybe you check the bank account once a day, once a month, or maybe once an hour! Times are tough; I get it. Depending on your level of involvement, you might be able to account for every dollar coming in and every dollar coming out — maybe all you need to know is that you can afford an Uber Eats order, and that is fine, too. As we come to another month-end during the unprecedented and fully awful time that is the COVID-19 pandemic, the thoughts of many business owners go to their bank accounts. With another month-end comes another round of bills to be paid. For businesses of any size, cash flow management is a delicate balance between what is due and what is due-ish, which could be the case in a good month. Uncertainty around cash inflows, makes it increasingly hard to plan for the outflows. Knowing what bills to pay can keep the lights on, literally. Knowing what can be pushed off can add some flexibility in the monthly cash flow cycle.
Some bills you think must be paid on time may, in fact, be paid late without penalties or interest. These are challenging times for everyone, and vendors are willing to work with customers — they are operating a business too, and when tasked with receiving something or nothing lends to a more understanding relationship to both parties.
Utility providers across the country are offering penalty-free late payments as well as a commitment to not disconnect service. Also, much like rent payments, utilities payments are not reported to credit reporting agencies. Not paying will not negatively impact an otherwise good credit standing if past due; however, if the bill is sent to collections, that would harm your credit score. You still are responsible for the bill; it just might not need to be paid this month.
Some expenses don’t have as much wiggle room for delayed payments, like taxes. Pay your taxes!
A simple test to see how you are doing is calculating an operating ratio for the prior months and see how you have done. The operating ratio can be calculated as follows:
Operating Expense / Net Credit Sales X 100
What this gives you is the percentage of total expenses to sales. For instance, say your expenses are $6,000 and net credit sales are $25,000. This would mean 24% of sales go towards operating expenses. Now say that the operating expenses remained the same. However, sales have dropped to $10,000, and now your operating ratio is up to 60 percent. This upward trend could continue unless expenses are reduced. Under normal circumstances, this knowledge would allow you to determine the requisite increase in sales or decrease in expenses to maintain operations. However, the current state of the economy may not have the same opportunities available to make this kind of changes.
When there is less certainty on the inflows of cash, it’s time to focus on the outflows.
Work with your vendors. Suspend any unused services and renegotiate what you can. Review existing contracts for cancellation penalties; sometimes it’s more economical to eat the one-time penalty than continue service for an extended period. If you are operating at a reduced capacity, your expenses should reflect that. Reduce janitorial services, suspend parking contracts, and find ways to serve your customers and employees in a way that reflects your level of business.
Utilizing a cash flow tool can provide clarity and comfort with the day-to-day. A functional tool for managing cash flow goes beyond adding and subtracting income and expenses and incorporates hypothetical scenarios into the model. What if I held off paying a particular expense this month? What if my sales improve? What if I reduced office space? Incorporating cash flow management tools into your planning takes you from reactive to proactive.