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Posted by: Charles P Myrick CPA Posted on: Jun 11 2020 Posted in: cash flow management, emergency cash flow management

Managing Cash Flow in an Emergency

The recent COVID-19 crisis has had a major impact on small businesses everywhere. Cash flow may be a challenge during normal times but this emergency is putting at risk the survival of each business. Further, it threatens the livelihood of owners and employees.

Cash Flow Monitoring

A potential cash flow crisis becomes a reality when businesses experience a significant loss of revenue. Decisions have to be made about expenses. Some things to consider:

  • Customers – How are your customers affected?
  • Cash inflow and outflow – What is balance between current revenue and cost of providing service?
  • Staff – Are reduction in hours or layoffs necessary?

Cash flow monitoring and forecasting are the tools you need to make the right decisions. A financial emergency requires a strategy for planning realistic options. Accountants recommend that those options include best and worst case scenarios to compare with your baseline or current situation. A critical first step is to evaluate your expenses and forecast your future income. This data will help you evaluate the potential cash flow scenarios and make the critical decisions that will impact the survival of your business.

Projecting the results of reduced income, even if temporary, will guide changes in spending priorities, billing, and business model. Up-to-date cash flow projections are necessary to quantify those changes.

Cash Burn Rate

In an emergency, you probably want to know “How long can we survive with the level of cash we have today?” The answer comes from an analysis of your cash burn rate. A burn rate measures how fast a company spends its available cash. The analysis helps you make decisions that can make your cash last longer.

There are two types of cash burn rates: •

  1. Gross cash burn rate – Total amount of cash you are spending per month. 
  2. Net cash burn rate – The difference between cash in and cash out per month.

How does this help? When you divide your current cash balance by the burn rate, you will know the number of months you can survive at the burn rate. During an emergency, knowing your burn rate contributes to sound decision making.

Help With Cash Flow Analysis

During this COVID-19 emergency, one of the best resources available is a small business accounting firm that provides cash flow analysis services. A CPA will be able to help you look at monthly, quarterly, and annual reports so that you can actually see how much money you have brought in and the anticipated profits in any given period. This information will help you manage cash flow by using better financial decisions so that you aren't spending more money than you have available.

Let me know when you would like to talk. As planners, we are here to assist you in navigating simple solutions. Stay safe, stay well, and stay tuned,

Charles and the Myrick CPA Team 

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If you want to achieve long-term financial success with your small business, contact us to learn more about the small business accounting services that are available. We work with clients located in the Washington DC area, and we also offer virtual business services for clients located anywhere. Contact us today to learn more: (202) 789-8898