Cash flow at the core of business resilience. Covid-19 cash flow menace

Introduction.

During this Covid-19 pandemic period many of the companies ranging from small enterprises to multinational companies have been going a deep threat of their abilities to meet the cash obligations when they are due. Some of these obligations vary from paying the bills, salaries, insurance premiums, payment to suppliers among others. I have also engaged a lot with people who are very bitter either because their employers have introduced salary cuts, sent them on unpaid leave citing that they do not have the money to pay them. This has created bitterness on the part of the employees who argue that their employers businesses have been making profit although for decades and that they should use part of the profit to cushion them during this time of Covid-19 pandemic. However, being in finance for over 10 years I would like to bring out the reason as to why your employer, customer, client may not be able to make that payment that you really need.

Why Cash flow and not Income.

Have you ever wondered why despite some of the multinational companies reporting losses in their books of accounts they are still carrying out the operations and still giving out the donations? Your guess it is as good as mine “Cash flow”. Cash flow is the amount of cash or cash equivalent that comes in and gets out of the business. There are several ways in which cash is transferred into business which includes payments by the customers for services offered or goods delivered, input from the directors which can either be equity or debt, credit facilities from financial institutions which again can be a debt or depending on the agreement between the parties, government bail outs among others which all are geared to ensure that there is business continuity as the cash flow is the lifeblood of every business from small enterprises, medium enterprises to multinational companies. Cash also gets out of the business either to pay the suppliers for services offered or goods delivered, payment of the bills such as rent, payment of bank loans, payment of salaries etc. In summary cash gets in and out of the business for operating activities, financing activities and investing activities.

Stable cash flow informs and directs key strategies in any business ranging from expansion, downsizing, new investments, and divesture among others. Cash flow also is very key in determining the compensation packages of the employees. It also guides on the relationship between the firm and the suppliers which are outlined on the credit terms agreements . The list is endless and any operational business requires funds to drive the operations. Cash flow is different from income but income is integral part of cash flow. Income refers to the revenue that a business gets from its operations and investments which depending on the accounting standards most specifically accrual accounting which requires the firms to recognize income when the transaction happens rather than when the payment is received meaning that no cash is received or paid out. The above fact defines what cash flow is.

A business relies on the continued operations in order to fund its activities. Most of the firms during this period of Covid -19 have either stopped their operations or scaled down their operations meaning that there is either zero cash or cash equivalent coming into the business or there is very little that is not able to meet the obligations. The profits that was reported in the previous years is not money that was in the bank accounts but just the difference between the income and expenses for a certain period hence that is why the said profit is not available to meet the cash obligations .

Just like in the informal sector , you will hear traders saying the profit they have made over the previous years but as well they are also suffering during this time to meet the cash obligations because whatever profits they have earned over the previous years they have either reinvested back in the business or invested them in other sectors which might not be realizing returns in the short run among others. Similarly, even the multinational companies operate not different from traders in the informal sectors as they have used their previous year’s profits to diversify their investments which in the short run may not be giving returns. Therefore the cash received from daily operations of business is used to meet the cash obligations when they are due.

Conclusion.

However, if you happen to own or work in the firms that are very liquid such as banks you may not feel the effects of the covid-19 especially if you are in a strategic position that monitors the financial performance of these institutions. Likewise there are also other companies that are always prepared for such unforeseen turbulences by setting aside some of their cash income either in fixed deposits where they can easily be converted to cash easily and be available to meet the cash obligations and again you will be lucky if you are in such company. We should also learn from Covid-19 disruption of the economic activities and ensure that going on forward either individuals, companies to be always be prepared for such pandemics and it might happen in your lifetime but ensuring that there is policy to guide this it will help the future of the company and future generations. All in all this too shall come to pass may be not as fast as we would like it to end but certainly we have to find a way to either live with it or control it.

Written by Peter Mwangi (B.A Hons, MSc. CPA-K)