Covid-19 Cash Flow FAQ 


Q: What is your number one tip to improve cash flow?


A: There are many things that you can ana­lyze on your bal­ance sheet from accounts receiv­able and inven­to­ry to accounts payable. The most com­mon improve­ment most com­pa­nies can make is stan­dard­iz­ing their invoic­ing and accounts receiv­able process­es. Too often, com­pa­nies wait until the end of the month to invoice. Could you invoice ear­li­er in the month to speed up col­lec­tions? Can you bill every week or every oth­er week ver­sus once a month? Ensure that you sub­mit your invoic­es ON TIME. We have seen many com­pa­nies who are sup­posed to sub­mit invoic­es by the 26th of the month, invoice them days late, which push­es back pay­ment on that invoice anoth­er month since it is processed in the fol­low­ing month instead of the cur­rent month.


The oth­er process your team should imple­ment, is fol­low­ing up on col­lec­tions. Com­pa­nies rarely take the time to fol­low up on their pay­ments because they don’t want to have the tough con­ver­sa­tions around past due invoic­es. If your pay­ment terms are 30 days, what is your process to fol­low up with cus­tomers once the invoice is 31 days past due? Reg­u­lar com­mu­ni­ca­tion with your cus­tomers can speed up col­lec­tions dra­mat­i­cal­ly so take the time and effort to cre­ate a sys­tem that works for you. You might want to even con­sid­er how you can elim­i­nate pay­ment terms all togeth­er. Just because it’s the norm for your indus­try to have x days as your pay­ment terms, why can’t you receive payments/deposits up front or have a sched­ule of pay­ments with the cus­tomer pay­ment infor­ma­tion on file ready to be processed at the agreed upon date.


Q: If you are in a solid cash position now, should you ask your lenders for relief anyway to improve cash flow in the short term even if you don’t need it. Will this hurt credit in the future?


A: It depends. We use a 16-week cash pro­jec­tion tool with our clients that let’s them see how far they can stretch their cash. If you are pro­ject­ed to run out of cash dur­ing that 16 week peri­od or cash will become extreme­ly tight at some point, you will want to eval­u­ate the options you have which includes ask­ing your lenders for relief dur­ing this time. If you are show­ing a steady or pos­i­tive cash flow, you may want to hold off on ask­ing your lenders for relief until your busi­ness tru­ly needs the assis­tance. Relief on your busi­ness loans would not have an impact on your per­son­al cred­it score, even if you are a per­son­al guar­an­tor. Those debts remain in the busi­ness and are owned sole­ly in the busi­ness which would pre­vent any issues on your per­son­al cred­it. Either way, we rec­om­mend imple­ment­ing a cash flow pro­jec­tion tool that works for your busi­ness so you can make an edu­cat­ed deci­sion based on your situation.


Q: If you are solid financially now, is it a good time to negotiate a larger line of credit?


A: Absolute­ly. Lines of cred­its are a great insur­ance pol­i­cy for busi­ness­es. For a min­i­mal annu­al renew­al fee, you have added pro­tec­tion to bor­row funds in times of need. You nev­er know when you may run into a sit­u­a­tion where you need to bor­row funds, so it does not hurt to have more avail­able to you. This does not mean that you ever have to use the addi­tion­al funds, but it increas­es the safe­ty net you have just in case.


The biggest chal­lenge that busi­ness­es run into is mis­us­ing their line of cred­it. Instead of using a con­ven­tion­al loan to buy a piece of equip­ment or make an invest­ment in the busi­ness, some own­ers have decid­ed to use their line of cred­it for this instead. The line of cred­it is only sup­posed to be used as a safe­ty net against your receiv­ables depend­ing on the tim­ing of when you receive cash. For exam­ple, if you are $10,000 short on pay­roll, you can bor­row against the line of cred­it for that amount and pay it off once you col­lect from your accounts receiv­able the fol­low­ing week. It is not meant for these long-term types of pur­chas­es. It can even hurt you in the future if you mis­used the line of cred­it for one of those longer term expens­es and run into a cash flow posi­tion where you need to float cash for a week or two but have exhaust­ed your bor­row­ing poten­tial since you have a large out­stand­ing line of cred­it. Also, be sure to keep mak­ing reg­u­lar pay­ments on your line of cred­it. Lenders want to see reg­u­lar pay­ment activ­i­ty since the line of cred­it is meant for tem­po­rary bor­row­ings. Each year, lenders do an analy­sis of the line of cred­it for renew­al. If they see that you keep a steady bal­ance on the line and there is no move­ment, they might want to term out the bal­ance instead of keep­ing the line of credit.


Q: Should we start to use our line of credit in these crazy times even if we don’t think we need it?


A: Sim­i­lar to debt relief from your lender ques­tion, it depends. Again, imple­ment a  cash flow pro­jec­tion tool to see when you may run into cash flow chal­lenges, if any. That will help you align your line of cred­it bor­row­ings with the needs of the busi­ness, because you will be able to see how short your cash bal­ance is. You can then deter­mine if your line of cred­it is enough to endure that stretch of time, or if you have to make oth­er choic­es around your cash flow.


Q: How should companies start looking at cutting expenses.


A: The first place many own­ers move to is cut­ting all of the lit­tle expens­es that do not have an impact on the busi­ness. While those are expens­es you can cut, they tend not to make a major cash sav­ings impact for you. Instead, start with look­ing at your rev­enue and expens­es in rela­tion to just $1. If you have $5 mil­lion in rev­enue, con­vert that to $1. Then, for all of your expens­es, divide the total by your rev­enue to get a per­cent­age of that $1. For exam­ple, if peo­ple costs rep­re­sent $2 mil­lion dol­lars, than that is $0.40 of your total $1. $1 mil­lion in mar­ket­ing expens­es would be $0.20 of that dol­lar. Do this for every expense cat­e­go­ry and see where your biggest expens­es are and start look­ing for improve­ments there. A one to two cent change in these cat­e­gories can often pro­vide a big­ger impact than all of the small­er expense items combined.


Q: From your work with firms across industries and across 4 recessions, do you have a standard recommendation with regards to sales and marketing — cut or invest in more — what do you recommend someone do right now?


A: This is a com­mon ques­tion, and a tough one as everyone’s mar­ket­ing sit­u­a­tion and poten­tial are dif­fer­ent in var­i­ous envi­ron­ments. Some busi­ness­es are boom­ing dur­ing the Covid-19 time while oth­ers are forced to shut down com­plete­ly. This is an unprece­dent­ed time and mar­ket­ing will depend on your own cir­cum­stances. Now is def­i­nite­ly a time work on all process­es and sys­tems. We men­tioned accounts receiv­able above, but this also includes inven­to­ry man­age­ment, expense man­age­ment, pro­duc­tion effi­cien­cy, team train­ing and sales and mar­ket­ing plans. Mar­ket­ing spends are an invest­ment and just with every oth­er invest­ment, you will want to see a return. Start with a clear plan of what results suc­cess­ful mar­ket­ing will mean to your busi­ness. From there, you will have iden­ti­fied spe­cif­ic mea­sures that you can track to see if your mar­ket­ing is pro­vid­ing the return you expect­ed. There is a fine line between not see­ing results yet because the mar­ket­ing sys­tem is new and is still get­ting start­ed and not see­ing results because what you are try­ing isn’t work­ing. Mea­sur­ing your results will help you decide between the two and help you iden­ti­fy if you should cut expens­es or con­tin­ue investing.


Q: How do you shift teams from focusing on revenue to gross profit to increase profitability and cash flow?


A: Busi­ness own­ers are fas­ci­nat­ed with rev­enue. How­ev­er, rev­enue means noth­ing if it doesn’t dri­ve prof­itabil­i­ty. Gross prof­it tells you how much mon­ey you have after pro­duc­ing your products/services to gen­er­ate that rev­enue. This gross prof­it is the amount you have to cov­er all of your fixed over­head expens­es and ulti­mate­ly deter­mines your lev­el of prof­itabil­i­ty. You can have extreme­ly high rev­enue num­bers, but if you don’t have the gross prof­it from those rev­enues to sup­port your dai­ly oper­a­tions, you are in big trou­ble. This is why gross prof­it is the most impor­tant num­ber for you and your team to man­age, not revenue.


It all starts with edu­ca­tion. At MACKEY, we run our busi­ness on com­plete open book man­age­ment. We dis­cuss our finan­cial results with the team month­ly, so every­one is aware of our rev­enue, expens­es and prof­its. This can be a scary thought for most busi­ness own­ers because they don’t want to share the prof­it num­ber with their team. In most cas­es, the team already has an idea in their head that you make way more than you actu­al­ly make. A good exer­cise to start with your team is to give every­one 100 pen­nies. Ask them how many pen­nies they think you spend on peo­ple, mar­ket­ing, rent, etc. until they have a final amount left over. Once they note what they have left over, restart the process and walk them through how many pen­nies these costs actu­al­ly rep­re­sent in your busi­ness. Many team mem­bers will be sur­prised what the final results are.


Once your team has an under­stand­ing of what it takes to run the busi­ness finan­cial­ly, they can bet­ter con­nect how their work impacts the busi­ness results. You can then start to imple­ment score­cards for your team to track the results in the 1–3 key activ­i­ties each employ­ee is respon­si­ble for achiev­ing. This isn’t to micro­man­age your team by any means, it’s to help your team be the most suc­cess­ful in their role that they can be. It is human nature for peo­ple to want to make a pos­i­tive impact through their work and this helps pave the way for your team to man­age and improve that impact.