If you're like me, you're suffering from shutdown fatigue. But as we slowly emerge from the COVID-19 pandemic, I think it's worth memorializing lessons learned (or reinforced) over the past few months.
One of the most important lessons? Managing your cash — from making sure you have cash on hand to forecasting cash flow — is crucial to the success of your business. Here are three reasons why that is — along with tips on how to keep the cash flowing in the future.
1. Cash = Flexibility
How many businesses had serious issues waiting for CARES Act funding to be disbursed? Based on our experiences with clients, about a month elapsed from the time the law was enacted on March 27 to when most of the programs were actually funded. It was stressful for everyone, but especially for those living draw to draw or paycheck to paycheck. (And of course, the stress level went up about tenfold for businesses shut out of the funding altogether.)
So what's the takeaway from that experience? As a general rule moving forward, you'll want either cash on hand or credit facilities that can support three to six months of your fixed costs. Business finance is really no different from personal finance in that regard — and for the same reason: Having an emergency fund when the unforeseen bad stuff happens gives you time to adapt. And if you don't think you can accumulate three to six months of readily available cash to get you through the next crisis, it might be time to review your business plan.2. Trade Terms Matter …
The world has changed a lot in three months. If you were a supplier offering 90-day terms to someone you shipped product to, you're likely sweating whether or not they're going to pay you. It's not good if your product or service is classified as an unsecured trade receivable in a bankruptcy proceeding.
Most people understand interest rates — but not everyone grasps that no-strings 90-day payment terms essentially allow customers three months' free use of your assets. If you feel you must continue to offer 90-day terms, you should at least consider also providing an alternative, like a discount for early payment. Imagine how much better you might feel at this point if you'd received a slew of discounted early payments just before the pandemic hit.
3. … And So Does the Bank You Use
This pandemic has shown that the bank you choose can make or break your business in a crisis. So it's important to look at what a given bank offers in totality rather than fixate on short-term gains.
Sure, it's great to pay 0.25% less on a loan or avoid incurring an annual fee for a line of credit. But that mentality probably harmed a lot of businesses when the coronavirus hit and triggered a life-or-death struggle to secure immediate cash through the Small Business Administration's Economic Injury Disaster Loan or Paycheck Protection Program (PPP) programs.
A smart strategy for the future is to line up preapproved credit facilities to draw on in times of uncertainty. Big companies do it, and smaller companies should, too. Having a bank with local credit underwriting is critical, especially if you have a "unique" business. Basically, banks need to listen to your story and take a bet that you'll pay them back. I understand the draw of the internet finance companies, but several of them went radio silent when the crisis hit.
In addition, bankers are subject to anti-money-laundering and know-your-customer rules requiring certain standards of due diligence, even when it comes to emergency programs like PPP. So why would they drop everything and go to the considerable extra effort necessary to give you a money-losing loan if you just walked in off the street and they never heard of you?
Building a successful business requires an innate ability to make money. However, making money isn't the same thing as managing money. And thousands, if not millions, of business leaders have learned from the coronavirus crisis that they need help in that area.
As you and your business begin to recover, there's no shame in networking with CPAs, bookkeepers, attorneys, bankers, insurance agents and other experts in the field to help you better prepare for what comes next. In fact, the only shame will be if you don't do that.