The COVID-19 pandemic continues to create unprecedented levels of uncertainty about what the future holds for many businesses and other organizations. In times like these, cash flow planning may seem like an impossible task. After all, how can you plan when it’s difficult to predict how the crisis will affect demand, customers’ ability to pay, vendors’ capacity to provide the goods and services you need, or when the next government shutdown might come. But arguably, cash flow planning is even more important in uncertain times than it is when things are stable. Understanding your cash flow — and how various events might affect it — enables you to spot negative trends early and respond to them quickly. It may also allow you to build cash reserves in the event of a crisis.
Weathering the Storm
Under ordinary circumstances, it’s advisable for organizations to develop a budget for the next three to five years and to review and adjust the budget on a monthly basis. Organizations should also strive to build a cash operating reserve — or “rainy day fund” — that will cover essential expenses for at least 90 days.
In the current environment, a long-term view may not seem feasible. Many organizations either did not have rainy day funds before the pandemic or depleted those funds over the last seven months. Some organizations were fortunate enough to receive Paycheck Protection Program (PPP) loans or other governmental relief to help them weather the storm, but those funds may now be running dry. The result: Many organizations have shifted their focus from long-term planning to short-term survival.
That doesn’t mean cash flow planning is no longer a valuable exercise. On the contrary, it may be even more critical than before. But it does mean that many organizations will need to change their approach.
Asking “What If?” Questions
The key to planning in an uncertain environment is to project cash flow under multiple scenarios, including the most likely scenario, the best-case scenario, and the worst-case scenario. You might even analyze intermediate downside scenarios that fall between the likely and worst-case scenarios, since the actions you take in response will depend on the severity of a particular outcome. Cash flow should be projected at least one year out, ideally three. When projecting cash flow, be sure to consider the pandemic’s impact not only on revenues but also on costs. Many organizations will incur new or higher costs related to things like facilitating remote work or implementing new health and safety protections in the workplace.
Armed with this information, you can develop plans for responding to various cash flow outcomes. For example, likely or downside scenarios may call for reductions in wages, hours or discretionary spending, while the worst-case scenario may require layoffs or other more drastic measures.
Once you have a plan, you should monitor your actual results, ideally on a weekly basis. This allows you to identify negative cash flow trends in near-real-time and react immediately to stop the bleeding when cash flow drops below a specified threshold. The earlier you spot dangerous trends, the more likely it is your response will be effective.
Managing Cash Flow
Every organization is different, so appropriate strategies for managing your cash flow will depend on your particular circumstances. Following are several strategies to consider:
- Talk to your vendors about extended payment terms. One thing you should not do is unilaterally delay payments to vendors, which can damage your relationships and make it more difficult to obtain the goods and services you need down the road. Instead, try to work out arrangements with vendors that are fair to both of you, remembering that they may be facing similar challenges.
- Focus on receivables. Issue invoices on a continuous and timely basis and be proactive about collecting, including sending out reminders before invoices are due. Offer discounts for early payments.
- Look for opportunities to cut expenses. This may include reducing discretionary spending on things like travel, entertainment, training and nonessential technology; imposing hiring freezes or reducing employee perks; and eliminating or delaying planned capital investments (but not if doing so will cause irreparable damage to your long-term prospects).
- Rethink lease-versus-buy decisions. There may even be opportunities to sell assets and lease them back.
- Explore methods of reducing labor costs without the need for layoffs or furloughs. Examples include offering early retirement, asking employees to give up or delay vacations, reducing work hours or cutting wages across the board. Some organizations have asked executives and other employees to take pay cuts now while promising to make them whole once the organization has recovered (essentially a no-interest loan from one’s employees).
- Consider alternative revenue sources, such as expanding to new markets or renting out unused property or equipment.
- Review your financing options, including existing lines of credit, new credit lines or government-subsidized loans. For existing credit, be sure that you remain in compliance with any debt covenants that require you to maintain a specified debt-to-equity ratio or meet other financial benchmarks. If you’re out of compliance, contact the lender immediately to request a waiver and avoid a technical default.
If these types of strategies are insufficient, you may need to consider more drastic measures, such as laying off employees, closing one or more locations, eliminating product or service lines or merging with another organization.
What About Organizations That Are Thriving?
Some organizations have suffered few ill effects of the pandemic, and some, such as certain technology and health care companies, are thriving. But these organizations can’t afford to ignore cash flow planning. It’s important for them to budget carefully, ensuring that their cash flow projections account for potential changes on the horizon. For example, are revenue increases temporary or permanent? Will things go back to “normal” once the pandemic is behind us? Does the budget reflect future payments on new financing or deferred payroll taxes?
Organizations that are doing well should also consider taking this opportunity to shore up their balance sheets by paying down debt, building up their cash reserves, or both.
Whether your organization is struggling or flourishing, cash flow planning should be an integral part of your risk management efforts in the current environment. Keep in mind that cash flow projections are merely guidelines — it’s critical to continually monitor your results and have the flexibility to adjust your plans accordingly.
If you have any questions on cash flow planning for your nonprofit, please complete the contact form below and a member of our nonprofit team will be in touch.