What is Cash Flow and Tips for Fixing During a Shortage

Cash flow is the lifeblood of any business. And a solid cash flow management strategy is key to weathering a crisis like COVID-19. Unfortunately, research from JP Morgan reveals that half of all small businesses hold a cash buffer of less than one month and 25 percent of small businesses hold fewer than 13 cash buffer days in reserve. When economic times are uncertain or you're in the throes of notoriously slow retail months, a low cash reserve leaves businesses susceptible to bankruptcy. 

Given the importance of cash flow in times of crisis, retailers should immediately develop a plan for cash management as part of their business continuity plans. Accounts receivable, accounts payable, and inventory are all components of working capital that retailers can optimize to access cash trapped on their balance sheets. 

Below, we’ve outlined the three basic steps you can take to get your books in order and optimize your cash flow.

Step 1: Organize your back office 

The first step is understanding your current cash position and how much “buffer” you currently have. The next step will be figuring out how to inject cash flow into your business (even if you’re not conducting business as usual). 

Here are some best practices to getting your books organized and optimizing your cash flow:

• Update your accounting records. Your accounting records are not only a reflection of your financial health, they’re also tools you can leverage to make informed decisions about your business. The good news is, updating your books doesn’t have to be an arduous task. You can automate your finances and accounting with solutions like Xero and A2X for Shopify. Backdating books with A2X can be done in minutes, and will ensure your finances are accurate and show your current financial position. And, with all information in one place in the single ledger, you can access real-time financial information through powerful and flexible reporting tools.
  
  
• Collect past due receivables. This is the time to proactively get in touch with vendors to understand why they might not be paying. If your vendors are struggling, ask them to be open and transparent, and present a payment plan. Proactively reaching out and collecting bills could be the difference between your business surviving and failing.
  
  
• Incentivize faster payments. This could include asking for an upfront payment before work has started or is completed, or offering incentives, such as discounts for earlier payment.

• Opt for electronic billing. Delivering invoices via mail will slow down billing and collection. Opt for sending invoices electronically and shortening your cash conversion cycle. You can get paid faster by offering online invoice payment options or processing payments remotely through payment gateways like Stripe, GoCardless, PayPal, Venmo and Square. 

• Optimize inventory control. Poor inventory control can lead to fewer sales, unhappy customers, and obsolete stock. Use inventory management tools to learn what’s selling and what’s not and receive real-time stock data. If you’re a Shopify POS customer, you can use Stocky by Shopify to review previous sales trends and gain better accuracy in financial reporting. 

Step 2: Forecast scenarios for your business

Forecasting scenarios will give you a view of your cash flow and whether you’ll have a shortage or surplus. If forecasting seems daunting, we recommend seeking the advice of an accountant or bookkeeper or using this handy forecasting template.

If you work with a bookkeeper, they can work with you and help you gain a clear understanding of where your retail business stands. You can build out as many scenarios as you want, but we recommend starting with three different scenarios: best case, likely case, and worse case. 

By assessing and tracking for these scenarios, you can gain a better understanding of how money is flowing in and out of your business. They will also help you understand if you can meet commitments like wages, accounts payable, and debt payments, so you can get ahead of the problem areas before they escalate. 

Step 3: Plan for a cash flow shortage

If you identify a shortage in any of your scenarios, you need to start thinking about how to pump cash flow back into your business. Broadly speaking, there are two approaches: mitigating costs and external funding. 

When mitigating costs, you can start by looking at your business expenses. Now is the time to be deliberate about where your money is going. If you can cancel or stop paying for services you aren’t using, those costs can be reallocated back into your business. Similarly, if you can work to get better payment terms from suppliers or vendors, you’ll benefit from getting cash back into your business faster. Lastly, for any retailers renting physical space during this time, try approaching your landlord about prorated or discounted rent. These steps will help your business be leaner and not just survive, but thrive. 

In addition to reducing costs, another option retailers may consider is external funding. Here are 5 ways you can access capital for your business:

• Government grants
• Small business loans (consider lenders like traditional banks or Shopify Capital)
• Funding from family and friends
• Crowdfunding
• Paycheck Protection Program

Looking ahead

For many retailers, the reality is we’re not going back to “business as usual.” If retailers apply the steps shared to optimize their cash flow, they’ll be better-positioned to innovate and take advantage of the rebound.

If you’re in a position to grow your retail business, you should look for ways to diversify your revenue stream and maintain a healthy cash flow. Selling new or complimentary products, advertising to different customer segments or demographics, or offering omnichannel experiences are all ways you can succeed in this “new normal” in the months to come. 

By diversifying products, you can support different categories, so if one is up or sales drop due to a pandemic, you can immediately pivot to focus on the other product,” he explains. “If you’re on a single channel now, consider diversifying your sales channels by opening up on more marketplaces. Finally, if you diversify your supply chain, you’ll have multiple vendors or manufacturers for your product.

With this progress, Scott says it’s essential to maintain updated books and keep cash flow at the forefront of your business strategy. “It always comes back to cash flow — retail businesses should be monitoring and managing their cash flow and know how much money is available for inventory, marketing and growth for the next 4-6 weeks,” Scott shares. 

“The COVID-19 pandemic made many sellers realize that it’s great to have detailed, trusted financials when times are good, but it’s critical when times are bad.”