Finance in the time of COVID19: 4 Ways To Manage Your Cash Flow

May 4, 2020 · 6 min read

For the past ten years, the finance community; from the market, to startups, to founders, and investors, there has been a central focus on gargantuan growth.

However, there has been little attention spent on ideas like self-sustainability or traditional business objects, like managing your cash flow.

It is not just a time of sustainability, but loss. Financial loss, yes, but also in many other very tragic ways. Many experts are advising to view this period as part of the journey, and every generation has its version of a crisis to manage — still, that doesn’t make it any easier.

However, as much as I would like to run and hide, we do need to rely on our practical side during times of high emotions.

Let’s explore ways to manage your business’ cash flow this period and help to prepare for possibly extensive financial loss.

  • Sustain the business by extending cash runway
  • Find your bearings in the market
  • Plan the for the unpredictable
  • Keep on top of governmental aids

After speaking to many of our portfolio companies regarding their current situation, or possible future situation, one key take away for me is that everyone needs to keep reality in check.

Main points that need to be accepted is:

  • Your highest-earning clients, the ones that have helped you grow to this point, probably will not pay you. They may not cancel their contract, but cash payment is another story. Expect not to be paid.
  • You should be doing the same to your vendors; delay payment as much and for as long as possible.

Holding on to cash in the short term to sustain the company’s skeletal operations is critical in the long run. Any available cash needs to go back into the business.

  1. How do you extend the cash runway?

You either increase the cash coming in, or you decrease the cash going out.

The more manageable option is decreasing your expenditures and reducing cash out. Some companies have approached their current customers and offered discounts for up-front payments of extended contracts. However, everyone is seeing a cash crunch; this is a harder sell.

To manage your cash is to reduce what you are spending. All non-essential expenses should be cut, put on hold, or reduced. Rent, once thought to be an essential expense, now with remote working at its peak, rent has become superfluous. With that comes a reduction in utilities (janitorial cleaning, electricity, gas, water).

Next, many companies have sourced credits from their prominent vendors, for example, Amazon web services, Microsoft Azures, and so on. These large companies have a sizeable cash runway and would prefer delayed payment than lose the customer altogether. Consider your marketing and sales costs and think of what makes sense at the moment. Will those efforts bring about the customers who will pay today?

Finally, and the most uncomfortable and challenging decision to make — what to do with the payroll. The most considerable expense on all our companies is that of human capital. This is a tough point to consider, but it must be thoroughly reviewed, not just from a financial perspective but from a cultural perspective.

Each company must address how they will manage their personnel costs. I have been in meetings where there is a sweeping suggestion to fire 30% of the companies’ employees immediately. I cringe at this straightforward and extreme response. It may be the right thing for one company, but not all.

It is essential to look at each company individually. Take consideration when you are assessing the startup size and stage. The internal culture and the roles of each team member must be understood. And finally, it is crucial to make sure there is little disruption and minimal demoralization amongst employees.

Many ways of reducing personal costs:

  • Remove one top-level executive whose salary could be more than five people’s salaries combined.
  • Reduce the whole workforce (including top executives) salaries by 30% across the board
  • Let go of 30% of your workforce.
  • Ask employees to take a certain amount of unpaid leave.

I have seen all these options in play. Whichever direction you choose to go in, take heed not to disrupt the core of your business and keep the trust of your workforce.

2. The world has changed, the world will continue to change, so therefore the market will follow.

You must understand the market for your product or service and how it will be affected by the social and economic situation.

If you are a service enabling people to work more efficiently remotely, how does the situation affect you today? And how will it affect you tomorrow? Depending on your product, it could go either way. For instance, maybe a heightened demand for your product has come as a result of the new working environment. Do you need to hire more staff to provide a better product now that it is in high-demand? Will this demand stay high after the world returns to work as we knew it before?

Make sure you analyze how your product or service fits in this new world. It will be the defining factor in your immediate business decisions.

3. How do you plan if you don’t even know what is coming?

No one told you that the price of oil would drop so dramatically. So how would you plan for it?

You do not plan for specific scenarios; instead, you put out trigger points.

For example, knowing your customer base, you can easily put in trigger points. If your biggest customer does not pay or delays payment or if more than 30% of your customers do not renew, then you need to put in a new action plan. Only you know your customer behavior, and only you know the work required to meet your customers’ needs; therefore, only the implementation of trigger points can come from you.

The key is to have significant points of review to help you quickly understand the change in your new reality. Times are changing fast; non-negotiable points may be reached. You must redo your plan, and it is very important to stay attuned to reality at the moment. I see many startups fundraise with a dreamed-up promise of a future possibility. Right now, is not the time for dreams and possibilities; right now is the time of understanding and responding to our current reality.

Those founders who internalize this idea will survive, and in turn, thrive in a future growth market.

4. Keep up with the news

Many governments are creating new incentives and initiatives to help companies through this troubled time.

Make sure you are aware of all your options and what you can use to help you get through this time. That might mean applying for loans earlier than you need them. Try to fundraise before you need the cash. Look for ways to supplement the revenue you have lost with grants and government incentives.

Some initiatives to look out for in the US are found on the SBA, Small Business Administration, with paycheck protection programs, and forgivable loans.

The UK is putting together the Future Fund to fund startups impacted by COVID-19.

The key is to find some funding support while you’re trying to get through this uncertain time.

And last but, certainly not least, I’ve only touched on ways to weather the storm financially, but it’s vital that you remember to take care of yourself and your people. It’s important to turn to mentors, partners, and others to make sure you have support in order not to burn out during such a unique time. You will need to adapt financially, operationally and psychologically in order to successfully get through these times.