5 Best practices for cash flow management during crisis

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Cash flow management during a crisis is a big challenge for companies.

Cash flow management during a crisis is a big challenge for companies. The last two years are the best proof of this. Many companies have only realised the importance of cash flow planning during the crisis. We want to summarise some of the lessons that companies have learned during the crisis and give you strategies to better prepare for future crises.

Cash flow management during covid: The problems it revealed

Cash flow management during the covid pandemic was a new one for many business leaders. The crisis has exposed many abuses that were not readily apparent in the past. It has shown companies how vulnerable they are to disrupted supply chains and payment defaults. Those without solid reserves were quickly confronted with cash problems.

You may also like this article: How does liquidity management work and why is it so important?

Many companies learned a very important lesson during the crisis: how important cash flow planning and cash flow management are. Whereas in the "good times" companies had decent turnover without accurate planning, this was no longer the case during the crisis. For many, this was the first reason to take a closer look at their cash flows - and for some it was already too late.

Therefore, it is important to establish a proper cash flow management already in the better times, so that you have immediate access to reliable data in times of crisis and know your cash flows at all times.

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5 cash flow management strategies

1. Plan ahead in detail

If you know how high your income and expenditure will be in the coming months, it is much easier to estimate whether a liquidity bottleneck is imminent. Then, in an emergency, you have more time to avert the bottleneck or limit its effects. A plan buys important time and is therefore indispensable, especially in times of crisis.

The cash flow should therefore be planned for several months in advance by comparing the expected income and expenditure. In a first step, one can orientate oneself on past income and expenditure. Some expenses in particular recur regularly (e.g. salary payments to employees), so that they can easily be projected into the coming months.

Through market and customer analyses, it is then possible to estimate roughly what income can be expected in the coming months and to include this in the planning. In this way, a "default scenario" is created that reflects a realistic business development.

2. Plan for the worst case

Starting from the "default scenario", it is also advisable to create a word-case scenario. What happens if my supplier can no longer deliver and my production stalls? How long will my cash reserves last to cover expenses?

By playing out such cases, weak points in cash flow management can be uncovered. A guideline is that cash reserves should be sufficient for at least six months to cover all costs in the absence of income.

If you simulate the worst case, you can quickly see whether you are well prepared for it. If this is not the case, you can take precautions at an early stage, for example by starting to build up reserves. If a worst-case scenario occurs, you are better prepared and cash shortages do not arise as quickly.

3. Use the right tools

Using appropriate tools for cash flow management makes the work much easier. However, many companies still use Excel, which involves a lot of manual work. Excel planning is rarely up-to-date because cash flow changes quickly and employees do not have the time to enter all new income and expenses into the spreadsheet every day. This leads to suboptimal and incomplete planning that is not very reliable.

If, on the other hand, you use special software developed for cash flow management, a lot of things run automatically: a good tool automatically retrieves the income and expenditure from the bank accounts and then updates the cash flow planning. This way, you can look at current figures every day and don't have to spend a lot of time updating an Excel spreadsheet. This is more time that can be spent on solving the problem during a crisis.

4. Always look for ways to optimise the cash flow

There are many factors that influence cash flow. Therefore, there are also many things that can be optimised to generate a solid and constant cash flow. Here is some food for thought:

  • Do customers pay their bills on time? If not: Can payment in advance be made more attractive, e.g. by offering discounts?
  • Are the payment terms on my invoices too long and does this regularly lead to cash problems? If so: Set your customers shorter deadlines.
  • Can I reduce my expenses, e.g. by negotiating new supply contracts, by saving on materials, transport costs, etc.?

5. Establish best practices in your cash flow management

A cash flow plan must be actively maintained. It is not enough to create it once and then not update it for months. It is therefore best to make a habit of some best practices so that cash flow management becomes a routine exercise. This can look like this, for example:

  1. Regular updating of the planning: at least monthly, better still weekly or even daily. Suitable software supports this, so that you always have the current data in front of you at the push of a button.
  2. Create worst case scenarios and take precautionary measures based on them
  3. Act as soon as a liquidity bottleneck becomes apparent in the default planning: Postponing usually makes the problem worse. Therefore, act as early as possible and do not try to ignore the bottleneck and hope for the best.

Summary: Cash flow management issues don't have to be the norm

As we have seen, a major problem during the pandemic was that companies were inadequately prepared for such a worst case. Even though cash flow planning cannot avoid unforeseen events, it can help prepare for them.

Sound cash flow management in a pandemic or other crisis helps managers make good decisions faster. Those who take precautionary measures and know their cash flow at all times have more control over it. If precise planning also shows what the company can expect in the coming months, managers can control the cash flow much better. Try it for free Agicap

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