Flattening the Curve of Cash Flow Gaps After COVID-19

Business closures due to COVID have resulted in cash flow gap problems. Fortunately, not all hope is lost. Here’s how to address the gaps.

Today, business owners face plenty of rough patches due to the COVID-19 pandemic. Self-isolation measures, social distancing rules, and travel restrictions have resulted in the suspension of operations and substantial declines in sales.

In the face of a pandemic, business owners now struggle with cash flow gaps. The closure of brick-and-mortar-stores, failure to fulfill customer orders and collapsing supply chains cause incoming cash to plummet, which could result in a negative cash flow. Because of this, many business owners are creating strategies, applying for a merchant cash advance (despite their bad credit) or downsizing the workforce to weather the current consequences and potential aftermath of the pandemic.

Understanding the Immediate Problem

Drops in sales cause the cash wheel (a tool that generates that required liquidity to operate a business) to slow down or stop. When sales continue to drop, the cash flow dries up. If you cannot stop the drop, cash outflows (payments for raw materials, salaries or supplies, merchandise, interest, and rent), cash reserves, and other lines of credit will be used up, resulting in a cash-flow gap.

The Reality of Sales

No cost, no sales — this is a reality business owners face. Retailers need to buy products or invest in services they can sell. The inverse of “no cost, no sales” (no cost without sales) is not always true for two reasons: time delays and a fixed cost.

In terms of costs, there are two types: fixed and variable. When sales drop, the variable cost drops too since lower sales volumes require fewer labor and materials — therefore, fewer payments. On the other hand, fixed costs remain in place and are more difficult to change. For example, you still have to pay rent even if your store is slow or has shortened hours, or even closed for weeks at a time!

Plus, variable costs do not disappear. As a result, business owners experience a rapid and sharp decline in their sales. Payments never stop when sales stop, which emphasizes the need for immediate action to prevent cash flow gaps.

How to Beat Cash Flow Gaps

Reduce Costs as Much as Possible

Assess your finances for the time being and consider reducing costs in non-essential areas. Start by listing your variable and fixed costs to start cuts. Depending on your current business model, ask yourself the following questions:

  • Can you temporarily cut the staff’s commission and offer a different incentive?
  • Are there alternate and more affordable ways to ship your products?

Also, consider how you can change fixed costs into variable ones. For example, consider cutting computer and maintenance costs to save more.

Prioritize Generating Cash Over Turning Profit

Profit doesn’t always equate to positive cash flow. What you need is money right now, so speed plays a factor as well.

If you have already tackled cash flow strengthening tasks (e.g. cutting variable costs), it’s easy to adjust your profit-generating actions toward cash-generating goals. Consider the follow cash-generating strategies:

  • Repackaging services or products for a consumer market. Many products reach consumers via a middleman or sold to businesses with office spaces. Encourage marketers to unleash their rebranding creativity and create a simple landing page to get your products in front of customers.
  • Offer exclusive discounts to customers. Acquiring new customers is more expensive than keeping the ones you have. Keep in mind that your current customers are bursting with pent-up demand. If you offer the right discounts with a compelling ‘exclusive’ message, you can boost sales and generate immediate cash.

Probably Wants to Help Your Business Not Only Survive – but Thrive!

The pandemic may have challenged the financial stability of your business, but there is no storm you can’t weather. Proper planning, budgeting, and strategizing can keep your business afloat until the time it’s “business as usual” again.

If you need assistance with your finances, Probably Yes is at your service. Call us today to learn more about our small business loans.