Ep_5 Cash-in, Cash-out

Jun 19, 2020

Episode 5 of the Coping with COVID-19 series for young entrepreneurs featured expert Miguel Sanchez de Pedro, Senior Partner at OxValue Advisers SL. This episode shed light on how to manage your finances when you have fluctuations on both the supply and demand side. Miguel shared insights stemming from his 50+ years of professional experience with youth entrepreneurs including tips on how to avoid the‘Valley of Death' and maintain a sufficient cash flow for your business during difficult times. Here are some key takeaways from it:

Why managing finances is important for your business

Although it can sometimes take a back seat to building an excellent product, but is of equal importance,, managing your finances plays a pivotal role in keeping your startup growing. Managing your finances can refer to keeping track of a variety of things, such as the debt, savings, cash flow or profit and losses of your business. In particular, for better or worse, any significant change in business conditions and operations can trigger a chain reaction that will affect your cash flow as well as other items on your balance sheet.

For entrepreneurs, it is worth keeping in mind the four cardinal points of finance to watch during a crisis: sell high vs buy low, and collect early vs pay late. Selling high and buying low will allow you to generate the gross margin or price differences for the goods or services that you sell, against the price that you pay. Meanwhile, remember what finance experts say, “A sale is only a sale when the money arrives in your bank account, before which point, it is merely a credit that you have to collect.” Collecting early and paying late are essential to maintain continued cash flow and sufficient liquidity for running your business.

Therefore, a smart financial strategy to ensure liquidity and maintain a steady cash flow can foster growth in both productive capital expenditures and efficient operational expenditures. In turn, this can increase sales and ideally profits, over time.

5 tips for entrepreneurs to avoid the ‘Valley of Death’ in times of crisis

1. Review your business model  During a crisis, be sure to ask yourself a few critical questions,

  • To what extent has the crisis impacted your business operations?
  • Are there any significant changes, in terms of your business offer, your customer attraction and retention rate, as well as the pricing?
  • Is there a need to adapt your market strategy in accordance with the shifted demands and behavior among the customers?
  • Is it good time to take your products or services digital?

All these questions will allow you to self-assess to gain a better sense of your status and guide you towards making smart decisions throughout the crisis.

2. Keep sufficient liquidity  This can potentially ‘make or break’ your business in difficult times. Miguel’s advice is to build up at least 3 months cash coverage for operating expenses to prepare yourself in the face of any possible challenges. If available, expand the use of instant payments, i.e. mobile money or Paypal, in order to decrease delayed payments and maintain a positive cash flow.

3. Review relevant trade terms  By this we are referring to the trade terms from both the suppliers and the buyers’ perspectives. On the one hand, you can negotiate with your suppliers to extend the number of days for payments, while trying to avoid overstocking goods in storage. On the other hand, following the approach of collecting early, you can promote discounts on advanced payments from your buyers. For instance, if you collect your credit from your customers within 30 days, while paying your suppliers in more than 60 days, it would allow you to have a ‘timely’ advantage in staying positive with your cash flow.

4. Review and assess the customers’ credit risks  This should be incorporated into your regular business management practices. Review customer credit risks twice every year and take into account any negative indicators, such as unpaid invoices and bankruptcy statements. In contrast, a customer with a better credit rating could be offered better sales terms. For instance, more flexible payment methods or discounts in offers. This can incentive customers to pay on time.

5. Save! Save and Save! Miguel could not stress enough the importance of keeping watch over your cash flow, to keep your cash tight and ensure sufficient liquidity and flexibility during the crisis. He cautioned that youth entrepreneurs in particular, who may have less savings, be aware of the rapidly changing environment around them and implement cost saving policies in times of crisis (and normal times too!). He also advised to delay any non-essential investments before conducting a comprehensive overview of the current market. Now is not the time to splash out and make big purchases; it is time to lay low and focus on the essentials.

To conclude, let's hear from Miguel in his own words on the importance of managing cash flow,

“Your company is like a tree. You need to water it, regularly. In this case, cash is like water, you must put in money or cash so that your tree can grow.”

Watch the full recording of the webinar below and see the complete slide deck from Miguel here!

Interested to hear more from young entrepreneurs on how to survive in crisis and how to maintain your mental well-being as well? Join our upcoming Ep_6 of the Coping with COVID-19 webinar series - Expect the Unexpected: A conversation between entrepreneurs on how to survive a crisis, on 30 June 2020, 16:30 - 17:45 PM (CEST). Register here

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