How to Project Cash Flow to Forecast the Impact of COVID-19

As uncertainty swirls around how long the COVID-19 crisis is going to last, many businesses are temporarily shuttered. The definition of “temporarily” is yet another unknown. Without knowing how long the crisis will continue, it’s critical to get a handle on your company’s funding needs.

We spoke with Greg Crabtree, chair of EO@Wharton Executive Education program, to gain insights on how to plan during these uncertain times.

Greg Crabtree is a speaker, author, entrepreneur and financial expert. Greg founded his own firm, Crabtree, Rowe and Berger, to focus on helping entrepreneurs build their economic engine. After being named to the Inc. 5000 list for 2019, Greg’s firm merged with Carr, Riggs & Ingram CPAs and Advisors, a top 25 U.S. accounting firm, ranked by Accounting Today. Greg is currently the organization’s partner-in-charge of their Huntsville, Alabama office.

In 2011, Greg’s first book, Simple Numbers, Straight Talk, Big Profits shares his core principles of how to turn your business into a wealth-building engine. In 2014, Greg contributed a chapter to Verne Harnish’s book, Scaling Up on how to improve profits though labor efficiency. In 2020, Greg will release his newest book, Simple Numbers 2.0: Rules for Smart Scaling.

What can entrepreneurs expect to learn from your presentation, “Simple Numbers Crisis Cash Flow Process”?

This presentation teaches business owners how to turn their projected profit and loss (P&L) into a cash flow forecast to project cash impact from the COVID-19 virus. The presentation is divided into two videos: Video 1 covers the basic planning concepts. Video 2 goes through case studies and instructions on how to use the templates to benefit your business.

My goal in making these videos is for entrepreneurs to be able to own your own data, own your own existence, roll up your sleeves and make a 90-day plan and/or a 180-day plan for your business so you can evaluate the cash required to move forward.

In your experience, what’s the top misunderstood financial-related function around running a business?

Entrepreneurs struggle to understand how their balance sheet connects to their P&L. By taking the traditional balance sheet and turning it into the Simple Numbers Capital format, you will better understand what parts of your balance sheet impact your cash flow. Once you understand the impact, you will be better prepared to influence key items to improve cash flow.

It’s important that entrepreneurs understand that profit is very different from cash flow:
• Every business model has a distinct profit and cash flow signature.
• In a crisis, you must have a keen understanding of when profit turns to cash.
• Expect a disruption of normal terms (expect to get paid slower, but you may have to pay faster)

Why is it so crucial for entrepreneurs to understand their cash flow and balance sheet now more than ever?

During economic disruption, customers will take longer to pay and vendors will need to be paid faster. You must factor these key changes in normal business terms to accurately predict cash flow, which is the lifeblood of a business.

Profitability and cash flow are two wildly different things. This is a time when you need to be in touch with how things move in your specific company. Entrepreneurs need to understand their Balance Sheet—not just the P&L. We’ve come up with a way to show you how to do that, which we detail in the videos.

We don’t know how long this crisis is going to last. With the current stay-at-home orders in many areas, most businesses need to prepare for a hard 90-day plan.

Some companies will need to make a 180-day plan. If the spring and summer months represent their selling season, they may be at a loss through January of next year. Hopefully most businesses will be through this in 90 days.

Once you create your 90-day plan, you can evaluate the cash required. How will you find it? Is it readily borrowed? Is it worth it to keep the doors open? Unfortunately, some businesses may be better off to “go dark” until this crisis passes—though hopefully more will choose to press through.

How can understanding these concepts help leaders better prepare for the impact of COVID-19?

Going through a formal cash flow analysis will give you a quantification of impact. Some business owners will over-estimate and others will under-estimate, but rarely will your gut estimate match the actual quantification.

We share more in the second video, but a preview of the exercise entails the following steps:

• Plan out monthly gross margin. Notice that we don’t say plan out revenue. For example: the restaurant industry. If your business is based on liquor sales as well as food sales, you’re not going to have the same margin if you’re only doing carry-out food. Gross margin equals your revenue minus the cost to get your product sold, not including labor.
• Consider non-labor expenses. Identify which expenses you can turn off or delay: Facilities? Rent? Discretionary expenses? With apologies to my marketing friends, you’ll likely be the first expense to be cut—but you’ll also be the first to come back once we resume business.
• Consider direct labor expense. Which employees do you absolutely need to produce your gross margin? As you consider this expense, be careful not to destroy the incredible teams you’ve built.
• Look at management labor last. You have to have a management team, but those are some of the higher-paid people. Can you make temporary pay cuts? Or suspend their pay?
• Evaluate resources and runway. Consider your cash position, access to debt, investors and disaster loan assistance. Decide if you can support more labor at full or reduced pay, or if you have to cut faster and harder than you originally thought.

I advise entrepreneurs to go through this formal exercise to let the data tell the story, rather than trying to manipulate the data into the story you want it to tell.

What action steps can entrepreneurs take to prepare their financials for scaling back up after the crisis?

Once you understand how profit percentage compares to trade capital percentage, you will be better prepared to make funding decisions, if needed, once the marketplace begins to recover.

Having a healthy understanding of how cash and product move within your business is a benefit to every business owner, both now in times of crisis and in the everyday management of your company.

This article was originally published on the EO Global Octane Blog.