Prepare for Post Crisis Impacts on Cash Flow

Coming Out of This Crisis, Cash Flows Will Not be Normal

As businesses start to reopen and try to get back to normal, we must keep in mind that the market liquidity will not be normal.  The strong economy and liquidity in the markets during the last few years provided more cash and confidence to pay bills sooner.

Company cash flows will not behave the same as they did prior to the crisis.  Companies should keep the following in mind when projecting their cash flow needs under various scenarios:

• Accounts Receivable Days (average time from sale to payment collection) will likely increase above pre-crisis levels with less liquidity in the markets
• Initial cash may be needed to rebuild inventories
• Cash to pay employees prior to sales ramping up
• Stress test timing / level of sales increases on cash projections
• Options to delay payments to vendors
• Additional costs related to safety and equipment to reopen
• Supply chain impacts on sales capacity

What Size Working Capital Line Of Credit Do I Need?

 
A working capital line of credit is a common source of funds to support the ups and downs in cash flow needs as a company grows.  A company cannot survive without adequate working capital to support the growth of the company.  I often get the question, “What size line of credit do I need?”

There are many factors that will influence this decision, such as: credit worthiness, risk tolerance, growth projections, cash reserves, other capital sources available, and many others.  However, a conservative general rule of thumb is to start with a working capital line of credit equal to the greater of:

1. 10% of top line sales
2. 80% of average Accounts Receivable plus 40% of average Inventory

It is critically important to accurately forecast future sales growth and the related impacts of higher Accounts Receivable and Inventory balances to incorporate into these calculations.  Ultimately, a detailed cash flow projection under multiple scenarios should be used to estimate the working capital needs and validate the adequacy of the line of credit.

If your business can benefit from the expertise of a trusted business advisor, who creates financial and goal clarity to increase cash and profitability through the development of a cash flow forecast analysis, get in touch today.