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The return of cash is king

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Andrew Colliver, CRO and Commercial Director 3 minute read

Promoted by Banjo Loans

As the international scale of the pandemic progresses through the complex ecosystem of the global economy, business owners are working with their trusted advisers to proactively balance shielding against downside risks with readiness for growth. At the same time these same business owners are dealing with the disruption to their workforce, supply chains and projected cash flow.

As a trusted adviser to SME clients, you will know that cash has always been king.In the current environment, cash is viewed together with a business’s financial headroom to survive and grow.

The operations and output of many SMEs’ will be impacted, while their staff and establishment outgoings remain fixed. Business owners, along with their trusted adviser, can review all assumptions that feed into their cash flow projections. They can run scenarios on profit and loss, balance sheet and cash flows through various degrees of interruption as to how their business may be affected.

Optimise the Cash Conversion Cycle

When we’ve been talking to clients over the last 3 months, many have told us that their accountants& advisers are recommending them to collect debtors as quickly possible, be careful when offering credit, and deploy available inventory on the floor. Now, more than ever, SMEs need to deploy this sound advice. They need to employ this counsel and combine it with other cash conversion cycle (CCC) initiatives that work for them. 

CCC is the capacity of a company to turn its goods and services to cash.  It’s calculated by a simple formula of length of time, measured in days, for a company to convert the investments and assets in its inventory into cash generated from sales. The shorter the CCC the better. There are a myriad of ways that a business can reduce their CCC. 

Some excellent initiatives employed by some of our clients include:

  1. Changing invoicing terms to a mix of cash upfront and remainder 14 days after end of month.
  2. Re-negotiating more favourable supplier payment terms.
  3. Running marketing campaigns to support clearance of inventory.

To truly add value, encourage your client to review their business to identify longer and more holistic measures to optimise the CCC.

Supply Chain

Encourage your clients to review upstream and downstream to identify where the vulnerabilities are. The impact on supply chains was highlighted during the shut-down in China, but as that disruption expands across the world, it is yet to be felt in some regions depending on lead times and component stocks.   Companies need to factor in contingencies around their specific supply chain, particularly on seasonal stock, as port and container backlogs are slowly cleared.

Forecasting Demand

In Australia, seasonal businesses will be significantly impacted if the disruption period has coincided with lower demand, leaving inefficiencies such as over-capacity or excess stock. It makes perfect commercial sense to review inputs to avoid having fixed commitments and outgoings, should turnover be significantly reduced. Mitigating actions that could be pursued include negotiating more flexible arrangements on purchases in case they need to be reduced or returned; and considering government support programs available to enable reduction in staff hours, salaries or headcount.

Businesses need to factor in that their customers will be looking for this same flexibility of arrangements as they in turn look to lessen their exposure. Businesses that deal in B2C markets can expect that their customers may wish to postpone large financial commitments and purchases, and will be reluctant to commit to events that they are unsure will go ahead.  The many ways that consumers are behaving differently during this period of disruption, such as avoiding gatherings and travel, or working from home, should be factored into projected demand – either positively or negatively.

Those serving B2B markets need to also look beyond their client to the ultimate end users to gain an understanding of their client’s exposure and how they may need support.  It will be important to work through how this will impact their business in terms of sales pipeline, stock and receiving payment, whilst maintaining good customer relationships.  

Service Delivery Models

Conducting an organisational business impact assessment will identify critical activities, key customers and core staff. This will almost certainly involve exploring alternative service delivery options; for example, home delivery or in-home services and online delivery platforms, and how this could be serviced by redeployment of current staff.  In this scenario, your client will need to ensure that they understand the terms and conditions of employee contracts, and decide how they wish to engage with their workforce should this arise. They may also need to engage additional or alternative staff or suppliers if their regular workforce is unavailable.

Change will be constant over the coming months, both in terms of government direction and consumer behaviour.   The primary focus of Government to date has been to minimise the costs of the crisis to Australian SMEs.  In the short to mid-term future we can expect that focus will shift to deregulation and productivity measures.  We may also see expansion and development activities rewarded through tax incentives. 

Australia has built an enviable response in cushioning the impact of COVD-19, and we can look forward with some optimism.

The return of cash is king
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