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BW Businessworld

Covid – 19: Managing Cash Flow During Crisis

Many companies today have already started thinking of alternate revenue streams to survive in this difficult market which has been hit hard due to the Covid-19 lockdown.

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As we all know, COVID-19 took the world completely by surprise. It affected businesses across the globe tremendously so much that IMF stated that this will be the worst recession in more than 100+ years. During this time, its crucial that companies prepare themselves for the worst not just to maintain work from home but also to store their data on cloud as the sales and collections department would be in focus during this turbulent time.

While companies are struggling to implement an immediate crisis mechanism, one thing is certain, i.e. this will affect the global economic and financial ramifications throughout the supply chain industry right from sourcing raw materials to finished products. It is during these uncertain times that restructuring of business operations, operating cash flow, cash and liquidity management is strictly considered. Growing market insecurity has caused companies to change their monthly cash flow predictions to daily monitoring and to match their Operating expenditure with Receivables collections.

Responding to the immediate challenge:

It’s critical that businesses examine their ecosystem and review their Capital projections, Balance Sheets, discuss their expanding Debt facilities with lenders, and make alternate arrangements with suppliers to extend credit.

Companies should also assess their funding requirements as part of their overall Business Risk and Continuity plans (BCPs). A treasury plan must be developed to reassess the adequacy of current funding sources under various potential downside scenarios. It is also essential to evaluate alternatives to unlock cash in financial supply chain by negotiating extension in credit periods. Therefore, continuous monitoring is essential to mitigate non-compliance risk and proactively socialize with Credit Rating agencies and banks to avoid reputational risk, penal interest and facility call-backs.

How to Efficiently Manage Cash Flow:

It has been rightly said that “Cash is king” and Cash flow is the blood that keeps the heart pumping, especially in times like these. It is one of the most critical components for businesses of any size, be it large, small or mid-sized. Running a business and then growing it puts a big strain on cash, whether it is to expand a facility or open a new office. All these situations require cash up front.

Strategic steps to effectively manage Cash Flow:

Cash-to-cash conversion cycle-

This is probably one of best method to generate a positive cash flow and maximize your return on investment. You can shape your cash conversion cycle by changing the way your business functions in numerous areas, comprising of sales, delivery, production and billing and payment cycles.

Credit and Strategic Risk Mitigation of Top 100 customers:

As we know, there are risks involved in every major business decision, hence, it's crucial to have a detailed strategy in place to measure and decrease risk. Credit and Risk mitigation strategies are designed to eliminate, reduce or control the impact of known risks such as Debts becoming Bad. Today’s technology allows businesses to formulate their risk mitigation strategies to the greatest capacity yet.

Business Continuity Planning (BCP):

In times of crisis like this, it is very important to have business continuity planning in place in order to avoid any unexpected threats. The pandemic has forced many countries to completely shut down by lockdowns and compulsory social distancing. So, the working culture will need to be re-strategized. Digital transformation strategies will also need to be changed and should be the highest priority for the survival of any organization.

Focus on reducing Days of Sales Outstanding (DSO):

The easiest way to reduce the Days of Sales Outstanding is timely billing and faster Receivables Collection and introducing faster payment incentives such as reducing net terms for payments. By automating your invoicing process, you may be able to reduce this to just a few days, thereby dropping weeks from your DSO.

Robust Processes and Error Free Contracts:

This can help businesses reduce the risk of error made manually and strengthen its control over Accounts Payable processing and contract reviews and renewals.

Convert Fixed to Variable costs, where possible:

It is advisable to review the need to switch fixed costs for variable costs specifically, sale and leaseback arrangement or other considerations such as contract manufacturing, freight outsourcing and third-party warehousing, Permanent Employees to Contract Employees.

Revisit Capital Investment plans:

The recent changes in the world economy fuelled by the Covid-19 pandemic has pushed us to look at our investment pool again. Hence, it’s important to sharpen and re-evaluate key Capital Investment decisions. The important aim of your capital investment decision should be to increase your company’s value by taking on a good project at the perfect time.

Improve your existing Inventory Management system:

Over the past few weeks, we have witnessed the increase in demand for some products while for some others there have been a significant decrease in usage. Therefore, it is vital that every business should evaluate the impact of this pandemic on their own business as well as anticipate the recovery from its effects.

Think of Alternate Revenue Streams:

Many companies today have already started thinking of alternate revenue streams to survive in this difficult market which has been hit hard due to the Covid-19 lockdown. So, think of other opportunities which will help you recover losses and make your business more resilient and stable in the long run.

At this time, all that is important is to sustain your cash flow and go that extra mile to decimate or reduce the impact of the pandemic. The uncertainty surrounding the pandemic has definitely made us think thrice and think harder about the way forward, right from our daily business operations to asset management to people and how we look at shaping the business from here on. We just hope that we all can cope with these challenges soon in the coming days.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Ravi Malhotra

Founder & CEO, Debt Nirvana

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