COVID-19: Cash flow assessment

Cash flow is the money that moves in and out of your business over a defined period of time. In other words, it’s the balance of money your company takes in versus how much it spends. COVID-19 border closures and lockdowns are causing supply chain and distribution delays, and altering customer purchasing behaviour. This could affect how quickly your business can collect money from customers and pay suppliers.

Cash flow assessments can help you identify potential problems and act quickly to determine if you need to adapt payments or apply for emergency business financing.

In this article:

Three things that affect cash flow:

1. Accounts receivable (cash inflow):

Money customers owe you for goods or services they have purchased.

2. Accounts payable (cash outflow):

Money you owe to suppliers.

Note: If you buy items on credit, it’s part of your cash outflow, but the cash is delayed to a later date.

3. Inventory:

The raw materials and finished goods purchased from suppliers and then sold to your customers to generate revenue. When you buy inventory on credit, it creates accounts payable—cash you’ll pay out in the future. When you sell inventory on credit, it creates accounts receivable—cash you’ll receive in the future.

The cash conversion cycle

How fast can you take in cash, convert it to inventory, and then turn the inventory back into cash? That’s the cash conversion cycle. A shorter conversion cycle is better. It means cash isn’t left unavailable to your business for long periods, and that inventory isn’t sitting and collecting dust.

The quicker you can collect money owing from customers, (accounts receivable), the shorter your cash conversion cycle.

How to calculate your cash conversion cycle

Average days inventory + Average days receivable – Average days payable = Cash conversion cycle

Understanding the results

A positive cash conversion cycle means slow cash flow. It means daily operations are tying up cash and you may require financing to support the business and pay suppliers on time.

A negative cash conversion cycle means quick cash flow. Your day-to-day operations are moving cash quickly through the business and you won’t have problems paying supplier invoices.

Cash flow assessment tools

Conducting regular cash flow forecasts is part of good business planning.

During a crisis conduct various scenario assessments, including short and long-term forecasts. These can help you anticipate the need to adapt payment schedules, change processes, seek new opportunities, prioritize certain business lines over others and determine whether you require financing.

13-week rolling cash flow management tool 

A 13-week cash flow planner forecasts your business’s cash inflow and outflow over the length of a fiscal quarter (13 weeks).  

Use the 13-week forecast to: 

  • perform short term planning and tracking 
  • assess burn rate scenarios (how much cash you spend over time) 
  • understand your business’s performance on a granular level that might be overlooked with a monthly or yearly planner 

Monthly cash flow management tool 

A monthly cash flow planner forecasts your cash flow for the next 12 months. It can be used in conjunction with the 13-week cash flow to get a full picture of your business’s financial health. 

Use the monthly planner to: 

  • estimate your cash flow in the medium to long term 
  • understand your business’s performance on a larger scale 

Cash-flow assessment tools

Download the cash-flow projection tools (13-week and monthly) as Excel files

Four ways to improve your cash flow during the COVID-19 crisis

The key to improving cash flow is getting customers to pay promptly.

  • Issue invoices faster—Mobile technology can help you get the invoice to the right person quickly.
  • Offer discounts for prompt or early payment—Even a 2% incentive can encourage people to pay. It can cost you money, however, so consider if you need to use this method.
  • Ask for early or upfront payment—If you have a good relationship with a customer, they may be willing to pay in advance for products or services. During a time of crisis, renegotiate terms wherever you can.
  • Electronic payments—Set up credit card and e-transfer options so clients can pay immediately.

Use the COVID-19 crisis to find new opportunities

Times of business disruption can be opportunities to develop new operational scenarios that explore additional sources of revenue, while reducing costs. New revenue streams and streamlined operations can be an important means of improving cash flow under difficult circumstances.

Explore more

Operations management

Create an action plan for your business and employees.

Sales and marketing plan

Map scenarios and test new ways to engage customers

Business and risk assessment

Identify key business functions and map risk.