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Flattening the Curve of Cash Flow Gaps After COVID-19

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.

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Cash Flow 101 – How to Understand Cash Flow Statements

Cash flow statements are financial statements that show the cash in and cash out for a given company. And though this may sound quite simple, there are many confusing parts in this common business paperwork.

Cash flow statements, or CFS, measure how well a business is able to generate cash, as well as how much more they are making (cash in) than they are using (cash out). Cash flow statements are meant to show how a business is able to pay its debts and fund its operating costs and is an important supplementary document to a balance sheet and income statement. In addition, a business’ cash flow statement is a mandatory part of a business’s financial report.

Let’s go over cash flow 101 and exactly how to interpret cash flow statements!

Cash Flow Statement 101

One use of your cash flow statement is to give investors a simple way to understand how your business is running, where your money is coming from, and where your money is going.

The second use of your cash flow statement is for creditors, who use your CFS to determine how much cash your company has to fund its needs and pay its debts.

This means your cash flow statement is used by both investors and creditors to judge the financial footing and viability of your business.

Cash Flow Statements Show:

  • How a business manages its cash or cash equivalents
  • How a business generates its cash or cash equivalents
  • How a business spends its cash or cash equivalents

Components of Cash Flow Statements:

Cash from Operating Activities

The operating activities on your cash flow statement reflect how much cash is directly generated from your products or services. This means accounts receivable, depreciation, inventory, and accounts payable are reflected in your operating activities section as well.

Cash from Investing Activities

Investing activities include all sources and uses of cash from your business’s investments, such as the purchase or sale of an asset, loans made to vendors, received from customers or payments related to a merger or acquisition.

Cash from Financing Activities

Cash from financing activities may include sources of cash from investors, loan companies, or banks. Dividend payments, stock repurchases, and the repayment of loans are all included in this category. These changes can be cash in when you receive financing, and cash out when you make loan payments.

Cash Flow Statements VS Balance Sheets

Your cash flow statement is distinct from your income statement or balance sheet because it never includes your future incoming or outgoing cash on credit. It is important to remember that cash is not the same as your business’s net income, which includes cash sales and sales made on credit. This of your cash flow statement as just that – only showing cold, hard cash.

Cash Flow Statement Summary

A cash flow statement measures your business’s strength, profitability, and the potential long-term future for your company – so it is not just important, but vital to understand!

Your CFS can help determine whether your company has enough cash to pay its expenses and ultimately, stay in business. In addition, your company can use your cash flow statement to predict future cash flow and create an accurate and viable budget.

By studying and understanding your own cash flow statement, you (or a creditor or investor) can get a clear picture of how much cash your business generates and get a better understanding of your financial strength for the future.

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