How to Manage Cash Flow in a Crisis

Tim Berry

7 min. read

Updated March 15, 2024

Download Now: Free Cash Flow Forecast Template

As I write this, we are neck-deep in the COVID-19 pandemic and the economic crisis that comes with it. People are staying home, not buying, not working their gigs, losing their jobs. And we business owners need to make sure that our businesses not only survive this crisis but find ways to thrive. Which at this point in time, means having cash readily available. 

For small businesses, cash flow management in a crisis is absolutely vital. It can mean the difference between stabilizing your business or falling behind.

To gain control, you need to focus on operational activities that put cash in your hands. Acknowledging a continued decline in sales and the need to lower expenses is obvious. But step one, today, is focusing on stabilizing and maintaining your operating cash flow. 

Here are five suggestions to immediately improve your cash flow:

  1. Monitor your accounts receivable carefully: Accounts Receivable is the list of customers that owe you money. In a downturn, some of your customers will delay paying you and some will default. Credit card customers may dispute charges. Now is the time to monitor these things closely and come up with a plan for how you will deal with issues that may arise.
  2. Get your customers to pay you faster. To encourage customers to pay you faster, and avoid not being paid at all, you can offer prompt payment discounts. Although your invoices might be due in 30 days, you may offer a discount if they pay immediately. Ideally, you’ll move away from invoicing customers and get customers to prepay you for your work – again, offering a discount is a great option to encourage payment ahead of time and quickly generate cash.
  3. Pay your bills a little slower. On the other side, similar to your customers, you most likely have outstanding or upcoming payables or Accounts Payable. The longer you wait to pay your bills, the more cash you’ll have in the bank. But, keep in mind that businesses that pay their bills slowly are not likely to be a vendor’s favorite. You have to weigh the pros and cons because paying too slow can hurt your relationship with vendors, but paying too fast can hurt cash flow. Find the right mix and push for those payment terms.
  4. Purchase less inventory. Some businesses make the mistake of buying too much inventory, which can tie up a lot of cash. Instead, see if it makes sense for your business to carry less inventory on hand and only order inventory when it’s absolutely needed. For the time being, look to liquidate any unnecessary inventory and recoup some of that cash, even if it means selling at a discount.
  5. Ask for discounts: Make a list of all the vendors you use, sorted by how much you spend with them. Call the biggest ones and negotiate for lower prices. You can even ask to sign a longer-term agreement with them in exchange for lower prices. Remember, this crisis will end and you’re trying to get through the short term.

Here are three longer-term term solutions to solve cash flow problems:

  1. Draw down existing lines of credit: If you already have a line of credit, now is the time to draw it down so you have cash on hand to handle different situations that may arise. It’s hard to predict the future at this point and how long things will take to recover, so it’s better to have cash on hand to handle worst-case scenarios.
  2. Apply for a business loan or line of credit: Applying for credit in a crisis can be difficult, but it’s worth a shot. If you have assets such as real estate or tangible assets, you may be able to use those assets to secure a line of credit. For small businesses, this often means personally guaranteeing a loan with your own home.
  3. Apply for an SBA Disaster Assistance Loan: The SBA is making hundreds of billions of dollars available for low-interest small business loans. To learn more about the requirements and what you’ll need to apply, check out our guide to SBA Economic Injury Disaster Loans.

How to use cash flow planning now to make good strategic decisions that will impact your future

Here’s a true story, a real-world example, from the last recession:

When the big recession hit in 2008, companies with business plans and good business planning process were able to adjust to the drop much more quickly than their competition. Sales dropped suddenly. The companies with a good planning process turned to their plans and quickly adjusted costs, expenses, marketing, and so forth to deal with the change. The ones without good planning had to dig into their business details during the crisis to develop and understand the connections. With planning, the connections are already there, so you adjust them.

If you already have a budget and a forecast for your business that helps you predict your cash flow, now is the time to dig in and create different scenarios to help you understand how changes in sales will impact your cash.

If you don’t currently have a forecast, that’s OK. Now is the perfect time to create one and put it to work. We have plenty of free forecasting and business planning documents available to get you started. However, if you want to avoid messing with spreadsheets, I recommend trying LivePlan for budgeting and forecasting to help automate the process. 

With your forecast in hand, you can anticipate how far things will fall, and identify the best ways to react:

  1. Figure out your burn rate and runway: How quickly are you using up your cash reserves and how long do you have before you run out of cash?
  2. Review marketing programs: Are there marketing programs that you should cut or reduce?
  3. Review payroll: For most businesses, payroll is the biggest cost. With your revised forecast, take a look at how changes in payroll could keep you afloat. You have options:
  • Freeze hiring
  • Layoffs
  • Cut all salaries by 20%
  • Cut leadership salaries
  1. Review all discretionary spending: From office supplies to employee perks and meals, take a close look at every expense and see what you can cut moving forward.

The benefit of having a plan is that you can quickly adjust your sales forecast, adjust your expense budget and see what impact that’s going to have on your cash flow moving forward. A cash flow forecast will highlight your trouble spots in advance so you have time to react and come up with solutions.

Don’t worry about having all the right answers when you first start forecasting. You just have to make your best guess at what future sales might look like and explore scenarios, with your plan, to help you make the best possible decisions about what expenses to cut and what to keep.

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Plan for the future and know that the crisis will not last forever

Every small business owner is currently experiencing the negative effects caused by the coronavirus. While this is both a health and economic crisis, just know that it will not be forever and that we’re all in this together. No one wants to see businesses fail, people out of work or struggling to make payments, and there’s a good chance you’ll find support amongst your customers and vendors.

I still remember vividly when I hit a wall with my own business and had to go to my vendors and tell them my payments would be made more slowly. I learned then that information and transparency can be the most effective method for surviving a crisis. Sure, they’d rather have your money but hearing from you, with explanations and promises, is an order of magnitude better than silence. And by reviewing your financial statements now and forecasting potential scenarios, you can also go to them with a plan of action.

If you need your customers to pay faster, brace yourself, everything is tightening up and they’re likely in a similar situation. Talk to customers, change the terms, offer discounts, protect your long-term relationships with them. 

Lastly, consider that it may be time to look for extra working capital. Keep your eyes open for government measures to help small business and business owners, and talk to your favorite banks too. Don’t give up or panic, there are plenty of opportunities to not just survive this crisis but emerge with a stronger business than before.

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Content Author: Tim Berry

Tim Berry

Tim Berry is the founder and chairman of Palo Alto Software , a co-founder of Borland International, and a recognized expert in business planning. He has an MBA from Stanford and degrees with honors from the University of Oregon and the University of Notre Dame. Today, Tim dedicates most of his time to blogging, teaching and evangelizing for business planning.