Optimize Your Cash Reserves

Right now, your top priority as a business owner is to optimize cash reserves as the magnitude and duration of the COVID-19 crisis remain unclear. Your assumptions about customers, sales cycles, revenue, cash flow, and cash runway are no longer true. Below are ten actions that you can take now to help you optimize your cash reserves.

What To Do To Optimize Your Cash Reserves

1. Calculate your cash on hand.
2. Assess additional capital that you can access. Additional capital includes outstanding accounts receivable adjusted for possible delayed payments and available lines of credit.
3. Stay on top of accounts receivable collections to avoid delinquent or nonpayment.
4. Prioritize your payments to employees and vendors.
5. Eliminate nonessential costs.
6. Consider ways to bring in revenue. For example, presale products and services, sell gift cards, offer curbside pick-up, provide local delivery, take your services online, or create digital products.
7. Prepare scenario plans for how market changes could impact your business.
8. Calculate your new cash flow adjusted for changes due to the crisis.
9. Determine your cash runway.
10. Engage your customers, so they are ready to come back when your doors open.

To get started see the example of a cash flow forecast and runway calculation below.

A Case Study – Cash Flow Forecast

Before the pandemic, restaurant sales averaged $75,000 per month. Total expenses were $64,500 per month split between fixed expenses of $16,500 and variable expenses of $48,000, resulting in a positive cash flow of $10,500 per month. Fixed expenses include rent and other incidental costs; variable expenses include food and beverage, restaurant labor, and additional incidental costs. The owner’s cash balance was $45,000.

After the pandemic, for the safety of citizens, the Governor issued a stay-at-home order. The owner was required to close his dining room.

Being the successful business owner that he was the owner reacted quickly. First, he moved to an online order option where customers could order food for pick-up or delivery. Next, he offered live cooking classes on Facebook, preselling the ingredients for pick-up or delivery. Fortunately, he had cultivated a social media following, which enabled him to communicate directly with his loyal customers.

The owner was able to save a fraction of his business. Sales dropped 60 percent to $30,000 per month, fixed expenses remained constant at $16,500 and estimated variable expenses dropped from $48,000 to $19,200. Unfortunately, even with the owner’s quick action, forecasted cash flow will be negative $5,700 per month. If his forecast assumptions are correct, the restaurant’s cash runway is approximately eight months – calculated as $45,000 beginning cash divided by the negative monthly cash flow of $5,700 per month.

 

Note: To simplify this example, I limited the analysis to one month of data. It is best to prepare a month by month cash flow forecast to allow for fluctuations in sales and variable costs and changes in your forecast assumptions.

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Do one thing: Send me an email to let me know your questions and how I can help you through the current business disaster. I’m here to answer your questions.   renita.wolf@poewolfpartners.com

Thanks for reading.