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Cashflow management in a post Covid-19 environment

With winter fast approaching, and the economic aftermath of Covid19 still lingering in this cold air, business leaders are today still faced with a unique conundrum of cashflow and people stabilisation vs pivoting their historic business operating models into a more platform based economy, that is required for future sustainable growth.

As we reflect over these challenges from the past year, I am sure that each of you as individuals, business leaders and shareholders, are immediately transported to the memories of the first level 5 lockdown; a feeling of uncertainty, a feeling of isolation and a feeling of despair, but as we sit here today, and although we still mourn the tragic loss of lives, collapse of many great businesses and no immediate sign of an economic recovery, we remain hopeful that the past has created a roadmap from which we can learn and grow.

As Commercial Bankers we have seen first-hand the financial and emotional impact on our economy, organisation, people and businesses at large, but at the same time we have had the privilege to observe the changing environment and simultaneously walk the path of transformative modernisation with both our organisation and that of our valued clients.

Over this time, we have accumulated an intrinsic knowledge pool of the key steps that businesses should follow to maintain, sustain and then grow into these ever-changing times. If we unpack these into a roadmap and follow the golden tread out of each of these business success stories, we can summarise as follows:

  1. Each fully understood the true economic impact on their business operating models and almost immediately adjusted their business plans to accommodate for this digital transformation of sales, service and people management.
  2. Each implemented first class safety protocols including PPE at the bricks and mortar operations with the end goal of providing maximum people protection, sustained business operations with limited down time, and a revised service charter which rewarded innovative ideas that navigated this challenging environment.
  3. Each introduced unified people strategies and wellness programmes, either centrally or via business partners, to help staff and families with the trauma and ongoing management of this stressful environment.
  4. Each actively engaged with staff and strategic business partners, (such a Suppliers, Debtors and Banks) to ensure that they understood the key strategic plan, revised business objectives for short and medium term stabilisation, and the rationale to move to digital interactions to ensure business continuation.
  5. Each focused on their balance sheet and income statements to unpack the main profitability drivers, cost levers and technology investment required; with the intent to identify new strategies to enhance liquidity, secure funding and ensure stability of cashflows during the pandemic.

With the pandemic now more than a year long, the question then becomes, what will I need to do next to ensure I pivot my business in this post Covid environment?

"My advice is simple, continue to invest in complimentary technologies that improve service, productivity and fixed costs; re-emphasise the sense of purpose from a human capital perspective including the encouragement of self-leadership, and lastly, always improve your cashflow management or liquidity by unpacking your cash conversion cycle and look at smarter ways to use to working capital facilities to unlock greater value."

In a recent article* by my colleague Gys Wilson, he unpacked the cash conversion cycle and importance of understanding how the movement between debtors, inventory and creditors translates into cash generated for day to day operations.

To expand on this, business owners also need to give consideration to on how they will grow their business by using these levers, including banking facilities, to leverage market opportunities and enhance their cashflows. A few suggestions include:

  1. With borrowing interest rates being at their lowest in many years, take advantage of settlement discounts offered by creditors which will, almost always, generate a net positive benefit. Current market trends suggest settlement discounts range from 2.5% all the way to 6%, and thus are very attractive when you compare your minimum of 30% per annum (2.5%*12mth) to that of Prime borrowing rate (7%).
  2. Create a deeper focus on your Debtor management process, such a contract validation, collections and granting of debtor limits. There may be opportunity to offer more attractive terms for strategic debtors and new business opportunities to grow market share.
  3. Invest in into a revised inventory holding strategy, strategies with smarter digital channel and delivery methods, thus optimising the supply chain. This for most businesses is a massive opportunity to unlock stagnant cash.
  4. Find a balanced approach between using shareholders' funds to manage the day to day operations, vs building a balance sheet for future expansion and growth. Although there are various academic views around this topic, I am still a firm believer that Debt is a cheaper instrument than Equity.
  5. Explore more advanced working capital product solutions, such as Debtor Finance and Selective Invoice Discounting, that will help you unlock your balance sheet and allow you to match your cashflow needs to your business growth strategy.

In closing, to manage your cashflow better, the recipe will always remain simple. Focus on your cashflow cycles and always ensure that your business and banking partners are side by side with you on your journey of growth or change.