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Operational Excellence Amid COVID-19: Five Practical Measures to Boost Cash Flow in a Crisis

By Francisco Colon, CPA, CFE, CGMA

As the COVID-19 pandemic continues to have a negative impact on the global economy, it is more important than ever that struggling businesses enact a strategic plan to address liquidity and mitigate the effects of the economic downturn.

In the following we will explain five “business hygiene” initiatives that can have a major impact on your bottom line and improve financial and operational efficiency now, and long after the crisis has passed:

  • Cash flow calibration
  • Operational cost assessment, optimization and reduction
  • Flexibility in payables and receivables
  • Revenue optimization
  • Tax planning

Cash flow calibration: Understand your cash flow

Cash is king, and the core question businesses need to answer right now is: “how much cash do I need to survive?” The answer will decide how the company maneuvers through the next few months.

The first step to realizing better cash flows is undergoing a frank assessment of your operating targets, specifically a labor analysis to optimize operational performance ensuring that revenues flow straight into the bottom line. Businesses need to take a hard look at business plans in conjunction with financial data and current operations to assess short-term liquidity needs, which will be the best guide to navigating through this volatile environment.

Cost-Assessment, cost-optimization, cost-reduction

Reducing costs is the natural next step to addressing a cash flow shortage, and if done strategically, it doesn’t have to impact value or revenue generation either.

Answering “How are we identifying removable cost?” will be at the center of this step. If there is one silver lining to this pandemic, it is that the standard virus response is already cutting them naturally. Reducing unnecessary travel, hiring freezes, and limiting discretionary spending are all the first steps that most of the business world has already taken.

The next step is to execute a risk process of evaluating necessary costs in alignment with value drivers. This will highlight inadequate use of financial resources and possible under optimize cost resulting in preventable operating expenses affecting your income statement.

Flexibility in payables and receivables

Under normal circumstances, it is often advised to expedite payments to suppliers and, if needed, take a slow approach to receivables. Today, companies need to take the exact opposite approach. Delaying payment to suppliers is a common strategy to preserve capital but be aware that communication is key across the supply chain so to not disrupt future operations. Expediting receivables and assuring quick payments will optimize cash flow from accounts. Ensuring a customer-centric and detailed invoicing process is central to minimizing relationship disruptions while doing so.

Taking both steps will allow a company to build liquid reserves to work from until the crisis abates.

Revenue optimization

The best entrepreneurs are those that think outside of the box and support their innovation with financial data. Revenue optimization is about evaluating the ability to grow through product offerings and the company’s ability to capitalize on market demand. The first step is to evaluate all the costs associated with production and determine if the price is in alignment with market demand. A successful pricing strategy is backed by actual financial data, as more products do not necessarily equate to more revenue.

The next step of optimizing your revenue is understanding your products lines’ demand in order to respond quickly to market movements (inventory movement). Let the data guide you to evaluate what is selling quickly and has high margins. Also identify cross-selling and upselling opportunities, with tactics like bundling, which could be used to generate more profit from the same customer.

Tax planning considerations

In response to the COVID-19 pandemic, legislators at the state and federal levels, including the IRS, have issued a broad range of tax relief programs aimed at supporting businesses during this crisis. There have been major updates to everything from tax deadlines to deferrals and key calculations.

For example, a change to qualified improvement property (QIP) calculations has created the opportunity for businesses to file amended tax returns with bonus depreciation that includes monies spent on facility repair.

Careful tax planning at this stage, informed by a deep understanding of recent tax code changes, can have a major impact on immediate cash flow, and long-term tax burden.

How MGO can help

Many businesses are experiencing severe cash-flow issues that affect the likelihood of continued operation. No solution should be overlooked at this stage. Consulting with experienced professionals could help identify opportunities to boost cash flow through operational, accounting and financial changes. If you’d like to schedule a consultation to discuss available options, please reach out to us.