How Does Cash Flow? Sales Go North; Cash Goes South

Cash flow planning is essential to insuring you’ll have the resources you need to not only survive 2020, but revive and grow. Every business needs one. Do you a cash flow plan that insures you’ll have enough cash reserves or credit available to revive your business?

In my last blog titled Your Shape of Recovery, I described how different businesses will experience different shapes of recovery. I warned that your shape of recovery will impact your cash flow in ways you may not expect. I mentioned how important it is to consider the shape of your recovery when you build your cash flow plan. You are building a cash flow plan, right? If so, great! If not, you should be.

Sales are Going Up. Why Do I Need a Cash Flow Plan?

Many are skeptical about the merits of time spent planning. “Surely, we’ll be out of the woods soon now that customers are returning and sales are headed north? Won’t we?”

It’s shocking, but solving the sales problem won’t necessarily solve the cash problem. At the risk of coming off like Debbie Downer, I’ve got to tell you that the sales spike you crave could make the cash problem worse. “What? Come on!”

Hang in there while I explain why.

As we make our way along this muddy, messy road on which we travel, we will hit some bumps. We may reopen only to close again. We may have been roaring along as an essential business only to have a long-term economic downturn catch up with us.

The good news is that no matter what our individual path, an upswing in sales is forthcoming. Eventually. The bad news is that once we hit it, we may need to write a whole lot of checks before the cash starts coming in.

What Impacts Cash Flow?

Inventory – Do I have the right stuff in stock? Our local wine shop’s revenues are up from Q1 (as an essential business they were never closed – thank goodness!). Interestingly, while customers are buying more wine, price points (aka average ticket values) are lower. As a result, gross profit dollars have shrunk. Now they must adjust their inventory mix to match the reality of new customer spending patterns. Meanwhile, significant dollars are invested in higher priced inventory for which demand is low.

Some businesses will find that items in stock since March are out of season or obsolete in June. Can they buy now for the right new inventory? How long will it be before they can turn their March inventory to cash? Will supply chain disruptions stand in the way of balancing stock to match the market? The wine shop faces trade tariffs making it more expensive to import from overseas, limiting their ability to stock bottles at lower price points. Will you somehow be challenged to adapt to changes in consumer behavior?

Staffing – Do I have the right team in place for my current level of sales? By now you’ve laid people off and will bring them back to meet the June 30 safe harbor for your PPP loan. Will you be over-staffed? How long will you keep them? Do you lay them off again and hope they’ll still be there when you need them? Or do you keep everyone on and hope for the best? With social distancing requirements do you have the physical space to keep them productive? Many will not.

PPE – Can I find it, and if so, at what price? Do you swallow the cost or pass it along to your customers? Either way, it’s cash out of pocket to get and keep it in stock. How does the increase in variable costs impact the volume needed to be profitable?

Accounts Receivable – Will my collection patterns change? What kind of recovery are my customers experiencing? You’re doing a good job managing your cash. Are your customers? If not, guess who becomes their new banker? You!

Inventory, accounts receivable, staffing changes and PPE requirements all require cash. Your cash gaps (shortages) may be significant even if you are profitable. This is especially true if your sales spike (due to the timing lag between when you collect yesterday’s sales and when recover the funds you commit to support the payroll and inventory needed to produce tomorrow’s sales).

So, as we bump along this muddy, messy road, we’re going to need a cleaner, clearer lenses to find our way. Clarity will come if you create three things:

A Sales Plan – A forecast of your projected revenue
A Profit Plan – Your revenue and expense budget
A Cash Flow Plan – A translation of your profit to cash flow, accounting for timing differences for collecting accounts receivable, purchasing inventory and paying suppliers.

Visualize the shape of your recovery and then seek to understand how cash flow differs from profit. Then plan appropriately to use credit lines and long-term financing. And if that’s not enough, find ways to collect quicker, reduce inventory, stretch out payment to suppliers and cut expenses.

None of this is fun. None of this is easy. All of this is possible.

Profit Soup is a financial training firm committed to improving profits and cash by lifting financial and planning acumen of business decision-makers. Learn more about our live training at www.Profitsoup.com or take a free online course at www.profitsouponline.com.