How much cash is tied up in your business? It is easy to see. Every time you look at a set of accounts, the balance sheet shows you the breakdown.

Of particular interest is that component that is the liquid part … bank accounts (positive or overdraft), debtors (accounts receivable), creditors (accounts payable), stock and those bills that are payable in the short term (such as the payments due on leases over the next few months or maybe GST, PAYG, BAS and other amounts due to the ATO).

When you add them all up, they will show your Working Capital. Hopefully, you have more liquid assets than short term liabilities. A lot more.

When businesses recently and suddenly needed to shut down or reorganise following the COVID-19 restrictions, the importance of cash became obvious. When revenue slowed or stopped, the clock was (and still is) ticking.

In some cases, the cash burn has been tempered by JobKeeper and the other subsidies available from the State and Federal governments. But for most businesses, the cash burn is still real. They are eating into their Working Capital fast. And for some, particularly for those in hospitality, tourism, food and beverage and entertainment, it remains overwhelming.

Virgin Australia chose to appoint an Administrator to buy them time to restructure whilst preserving their cash burn. Several favourite Melbourne restaurants have closed their doors forever. Other businesses are holding on … just waiting for the gradual release of restrictions that might enable them to salvage their business and brand. All the while hoping that a resurgence will not place a renewed pressure on precious cash.

In the meantime, the banks have been accommodating. There is a range of rent relief measures designed to ‘spread the pain’ all the way back to the landlord’s bankers.

Even though we are likely to experience a technical recession, the long-term impact for the economy may be far less than we feared. However, for many individual businesses, their economic reality may take a long time to return to ‘normal’. Make no mistake, eventually the banks will run out of both funds and patience if this was to continue on too long. The governments also have limits.

It all seems to depend on the ability for us all to get back to work.

Right now, we seem to have the return to normality ‘under control’. Renewed outbreaks and hotspots are expected to occur but hopefully these will be small and will not disrupt our recovering businesses. Nevertheless, business risk management necessitates us to contemplate a partial return to restrictions sometime in the future.

So, what should business owners do right now?

Firstly, understand your current and short-term future cash flows. What is your Working Capital position right now? Put it in a spreadsheet (your accounting system will give you this data easily) and look at the inflows and outflows in the coming months.

And you never really looked at the balance sheet before? It makes more sense now.

Next, do the ‘what if’ scenarios. What if revenue is out by say, 20% (both positively and negatively)? What would happen if your largest debtor became insolvent? What happens when JobKeeper, rent and other subsidies stop or slow down? What if you sold some assets? What if you reorganised your finances? These different scenarios may never eventuate, but should they happen, at least you know what happens to your cash.

This is a confronting project. You may even be staring at Armageddon. But you might also be thinking about the future and contemplating your courses of action long in advance of any sense of panic (by others) that may arise. It might be not just survival but a period of consolidation.

Indeed, we talk about a range of smart business strategies in our Downturn Survival Guide that you might find interesting.

One day soon, we expect that business will return to a focus on profit. After all, as Accountants, we love profit! So do Governments, as most of our tax system is based on business profits. And of course, profits underpin the value of your business. Your own future exit strategies depend on such value.

But right now, for many business owners, the old adage was never truer:

Growth is Vanity
Profit is Sanity, but
Cash is King!