Strategies for Managing your Cash Flow during COVID-19

Given the current situation in the construction industry and the financial challenges business owners often face, many are wondering what they should be doing with their cash in the bank. Among the most frequent questions clients ask me is, “Who do I pay first?”

Let’s take a closer look at who should have priority and why — as well as the effects of major equipment purchases on cash flow, and some tips on managing your cash flow.

Who Should I Pay First?

When cash is tight, your priority is to keep the jobs going; without that your cash flow ceases. Most contractors know you need to pay for labour and materials first.

You also need to know which commitments you’ve personally guaranteed, and the impact of business debts should you default. If you’ve personally guaranteed a defaulted debt, you’ll be required to cover it with personal assets. You may have to sell personal assets to pay corporate debts — and it can affect your personal credit as well. If you have not personally guaranteed the debt, your business may be able to default with minimal effects on your personal finances.

If you were to priority-rank your creditors, the Canada Revenue Agency should be near the top of your list. The CRA has the authority to freeze your accounts and withdraw funds. It will not ask before doing so and can create serious cash flow issues if you’re behind on payments. It also can direct your customers to pay any outstanding debts or invoices to the CRA directly.

Also, the CRA considers certain debts such as GST and payroll remittances to be money held in trust for the government. These debts may have to be assumed by directors if a business defaults on remittances. You need to treat these the same as the big three business expenses mentioned above.

Cash flow Management Tips

There are some strategies to create a better cash flow in your business:

1. Understand your cash flow needs

Using your forecasts and our 13-week running cashflow template ( download) as a guide, prepare weekly cash flow forecasts for at least the next three to eight months. This will help you understand your cash flow needs and determine how long your business can continue without burning through your working capital.

Now you need to focus on strengthening cash flow.

2. Develop key supplier and customer engagement strategies

Identify all the customers and vendors who represent critical accounts. Reach out to those critical customers to understand if and how their needs have shifted.

Consider whether you need to adjust your sales channels. For example, some customers who were historically uncomfortable operating in a digital world may be changing their preferences. This is creating new business dynamics going forward.

To minimize supply chain disruptions, coordinate with key suppliers to ensure you can meet your critical deadlines. Communication and collaboration are essential, so initiate discussions regarding your supply needs and their commitment to meeting these needs. Then create specific procedures to engage and retain these strategic partners.

To preserve cash flow gaps, manage payables carefully, prioritizing important strategic vendors when timing payments. For others, discuss flexible or extended payments.

3. Tap into government support programs

Now’s the time to maximize government grants, tax and filing deferrals, credits and other financial or worker support opportunities for your business. Some programs are being extended or modified. Check out our most up-to-date list, and more Covid-19 resources at www.mnp.ca/en/covid-19.

Equipment Purchases and Cash flow

Buying a new piece of equipment is a regular occurrence in the industry. Most people consider the overall price of the items as well as the cost to finance. Only some consider the impact on cash flow. The length of the term and down payment play a significant role.

You can decrease your business’ monthly cash requirements by lengthening the term of your purchase. The shorter the term, the quicker you’ll be required to pay off the purchase price. It will mean paying more interest, but a longer term can reduce your monthly cash outflow.

Try to minimize your down payments to ensure stable cash flow. Large up-front payments can create unnecessary burdens. The only time you may wish to increase your down payment to create a lower and more stable monthly payment. However, if this is the case, you need to step back and think: could this equipment earn enough to pay the monthly payment based on the minimum down payment?

Conclusion

Cash flow is tricky and should always be something you focus on. Try to work on your cash flow using some of these tips. All strong businesses have good cash flow and use many of these strategies to maximize their opportunities of success.

About MNP’s Real Estate and Construction Services

At MNP, we believe in being your partner in business. That’s why all sectors of the real estate and construction industry across B.C. rely on MNP for industry-specific expertise and services that go beyond traditional accounting and tax. From project structuring and tax minimization to asset protection and succession, our Real Estate and Construction team looks at your operation from all angles and develops personalized strategies to help you succeed.

For more information, please contact Rob Wesley, BC Leader Real Estate & Construction Services at 604.542.6713 or [email protected].