Importance of cash flow management post-COVID-19

The COVID-19 forbearance era has allowed many businesses to benefit from what might be a described as a liquidity bubble. When these businesses look at their bank balances, the levels may look healthy by historical standards and perhaps hide the true impact of the COVID-19 pandemic on their trading. Many of these businesses would be strapped for cash without leniency from their creditors, such as Revenue providing warehousing mechanisms for recent tax liabilities, landlords allowing a deferment of rent and banks providing interest-only periods on existing loans.

The pendulum in recent times may have swung in favour of cash accumulation in businesses, but like all pendulums it swings in both directions, and after COVID-era forbearance there is likely to be a catch-up in payments required, which will deplete current cash reserves.

In a growth cycle, most businesses need to invest in working capital to fund their growth. This is compared to periods when businesses have had to scale back, such as during COVID-19, where the working capital cycle reverses and cash needs to be released back into the business. 

The immediate key task now for business owners is to predict the likely extent of short-term funding requirements considering the day-to-day trading needs, the possible cost of investment needed to reboot the business, and the requirement to deal with deferred payments and unwinding of forbearance arrangements from the COVID era.

The full extent of the funding requirements for the business is best estimated by preparing projected cash flows for the next two to three years. Now is a good time for even the most established businesses to prepare a new post-COVID-era business plan which focuses the management to take a deeper look at business fundamentals going forward and the likely evolving cash flow needs. 

This analysis of working capital needs may identify a requirement to convert assets to cash. This might include finance leases, inventory loans, invoice discounting or sale and leaseback of properties. Such credit lines are known as external sources of liquidity.

The cheapest form of liquidity is internally generated, such as achieving cost savings to improve profit margins, or more efficient debtor collection. The provision of forbearance to customers may have been necessary to sustain businesses during pandemic trading conditions, but these arrangements now need to return to normal credit terms. To improve cash collections and reduce the risk of bad debts, businesses will need to define weekly cash flow collection targets internally and send more frequent reminders on unpaid invoices, informing customers that future service cannot be continued unless the account is brought back to normal credit terms.

Often, it is a lack of liquidity rather than a lack of profits that is the ultimate cause of business failure. A focus on the current bank balance and most recent quarterly profit and loss can often present a picture of financial health, but this can deteriorate quickly, especially in the post-COVID business cycle that now exists. 

Being proactive by involving your internal and external accounting supports, doing cash flow projections and doing the basics of cash flow management well will be worthwhile activities in the months ahead as we emerge into a new normal. There is plenty of potential for business growth, but we need to ensure it is properly funded and not marred by bad debts. There is plenty of funding available for working capital across the pillar banks and alternative lenders for good businesses. 

For the right advice on how best to ensure your business is protected in terms of having adequate liquidity and implementing good cash flow management fundamentals, your next move should be a call to Crowe. Please contact the head of Crowe’s corporate restructuring and insolvency team, Aiden Murphy to arrange an appointment.