Jessica is a senior accounting professional with over 10 years of progressive experience in full-cycle accounting and finance. Originally wishing to pursue a career in medicine, she discovered her undying love of all things numerical in university and has never looked back. Jessica is a "get 'er done" kind of gal who values process, logic, and organization as well as her daily Starbucks.

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Cash Flow During a Pandemic

The last few months have been disruptive (to say the least) for many businesses. This has affected consumer habits, business operations and cash flow. I recently had the opportunity to participate in ATB Financials’ monthly webinar on “Understanding Cash Flow during Times of Increased Uncertainty”. I found it surprising how basic the nature of some of the questions were. As Vovia’s controller, cash flow management is pretty much second nature to me but this isn’t the case for everyone. I believe that it is important for every business to always be on top of its cash flow. However, the Covid-19 pandemic has further increased its importance.

Calculator on spreadsheet

I thought I would deviate from our typical blog topics today and focus on the area of cash flow. Specifically, we will take some time to explore:

  • Net Cash Flows
  • Timing of Cash Flows
  • Burn Rate
  • Cash Runway
  • Funding the Gap

Net Cash Flows

At its most basic level, cash flow is made up of a simple formula:

Cash Inflows – Cash Outflows = Net Cash Position

Let’s look at each of these variables in more detail.

Cash Inflows

Cash can be generated from a variety of sources but, in most cases, much of the cash your business takes in will come from either cash or credit sales. Cash sales differ from credit sales in that the cash is immediately available for use within the business whereas credit sales have a timing gap between when the sale is made and when payment arrives. More about that later…

Cash Outflows

We humans are never at a loss for ways in which to spend our money. The same goes for businesses. Cash can go out the door for a myriad of reasons including payroll, lease payments, inventory purchases, equipment purchases, advertising, and office supplies (I could go on and on and on). Similarly to cash inflows, your business may have credit terms that allow you to delay payment on some of these items creating a timing gap between when an item is purchased and when payment is due. More about that later…

Net Cash Position

Once you have analyzed all your sources of cash (both inflows and outflows), you can calculate your net cash position. If Cash Inflows > Cash Outflows, Net Cash Position will be positive. Similarly, if Cash Inflows < Cash Outflows, Net Cash Position will be negative. The second scenario is more concerning because it will require additional sources of cash to fund the difference as well as an understanding of your Burn Rate and Cash Runway.  

Timing of Cash Flows

Depending on the terms your business has established with your customers and vendors, there may be a timing gap between when sales and purchases are made and when the related cash transaction takes place. It is important that you are aware of what this gap is in both scenarios so that you can make reasonable predictions around timing. A secondary benefit of being aware of this gap is the opportunity to analyze if your customers are paying within your established credit terms or if you need to take steps to improve your credit collection processes.

Burn Rate

Burn rate is the speed with which a business uses their available cash. It can be calculated for any given time period but best practice is to look at it monthly:

Burn Rate = Ending Net Cash Position – Opening Net Cash Position

If Ending Net Cash Position > Opening Net Cash Position, your business is bringing in cash each month and not burning through its reserves. However, if Ending Net Cash Position < Opening Net Cash Position, your business is burning through its reserves and you need to consider your cash runway.

Cash Runway

Cash Runway is the length of time a business can continue to operate considering its cash reserves as well as its burn rate and allows you to understand the severity of the cash issue you may be facing:

Cash Runway = Cash Reserves ÷ Burn Rate

The higher your cash runway ratio is, the longer your runway and vice versa. 

Funding the Gap

If you predict that your business will be in a negative Net Cash Position, additional sources of cash will be needed to fund the difference, slow your burn rate, and lengthen your cash runway. This can come from many sources including increased revenues, cost reductions, short-term financing, long-term financing, and cash injections from shareholders. 

The solution you seek will depend on the circumstances of your business. However, it is important to consider any impact on cash outflows that might be triggered because of your choice (IE. interest charges on financing) and factor them into your cash flow analysis.

Best of luck navigating your own cash flow situation! I hope you found some of this information helpful.