The longer the economic containment continues due to COVID-19, the scarcer cash will become. This is a harsh reality for most businesses, especially SMBs that depend on monthly cash inflows to pay bills. Treat your cash as king is a recommendation we made in a previous post. A business can literally decide not to make any more payments to anyone. Yet, and unless you are shutting your doors completely and forever, then the reality is usually a bit more complicated for various reasons:
- You want to try to sustain your business for as long as possible until containment eases
- You have built a relationship with your vendors and you probably don’t want to burn bridges with them (or at least not all – see the below section on analyzing your accounts payable). In fact, chances are their situation is similar to yours and you will both depend on each other again in the future
- You ought to remember that the cause of your pains is a forced drop in demand and not a natural one. Yes, high unemployment might affect demand for your product or service even after containment eases but here is where forecasting plays a role (topic of a future blog post)
Below is a 5-step process that finance teams can follow to manage payments during rough times. We will focus on external payments to vendors.
- Analyze Your Accounts Payable
- Build a 13-Week Cash Flow
- Baseline Costs
- Calibrate Costs
- Automate your AP Approval Workflow
Analyze Your Accounts Payable
Businesses rarely pay invoices right away. So, it is important to bucket your vendors. Big companies with large procurement departments often work with consultants on building their "Spend Cube", which is a review of spend data presented as a multidimensional cube. The dimensions typically are categories purchased across the organization, departments buying such categories and comparative spend with different suppliers.
This might be overdoing it with SMBs but the same logic can be applied in a simpler framework. The idea is prioritizing and seeing where you can book savings. One framework I like to use is illustrated below:
Build a 13-Week Cash Flow to Manage Payments
For businesses running low on cash, a good practice is to build a 13-week cash flow in parallel to the previous step. This tool tracks the inflows and outflows in weekly increments and lets you plan accordingly. The goal is to have your outflows come after your inflows with your cash in bank balance not going under a certain threshold. It lets you see when you need some kind of overdraft or other type of funding. Tools like Dryrun and Runway might be of use here.
The previous steps allow you to see where you need to make, delay or pause payments in order to make ends meet. Come up with your list of vendors / costs and baseline the figures for the purpose of negotiations.
For example, if you see that a certain discount with a vendor will allow you to extend your cash runway by an extra 2 months, look back at the last 3 months and how much you paid them. That should be your baseline for negotiation and modelling any new price.
If it is a variable expense that depends on your revenues and such revenues are forecasted to drop, then de facto such expense will go down. However, the point of baselining is to do relative cost savings. Basically, you want to pay less for the same level of volume.
After you negotiate with your vendors, you can start applying the new prices to the future by updating your 13-week cash flow (if you decide to build it) and profit and loss and cash flow forecast for the next 12 months. You can play with multiple revenue scenarios to see the impact on your ending cash balance. If you extracted the maximum cost savings possible to continue running the business and you are in the red under the worst-case scenario, you will need to look for alternative sources of funding.
Automate Your AP Approval Workflow
The success of the above steps requires tight control and visibility into all payments going out. You basically need to control the payment approval workflow, be it by category of expense, vendor or payment size or all three. You are looking for visibility and accountability into who is paying for what and when. It is best practice to do so in normal and good times but even more critical in tough times.
With teams working remotely, it becomes ever more critical to also move such workflow to the cloud. A tool like Plooto allows you to manage approvals and process payments digitally.