A liquidity forecast will help you stay ahead of the crisis

The impact of corona

Corona, or COVID-19, has major implications for many business owners. Chances are you will be affected by one or more of the following:

• Revenue reduction, both short- and long-term.
• Purchasing problems because certain parts or products are not available.
• Reduced production capacity, for example due to closure, working from home or illness.

This all affects your financial position. Making a liquidity budget is therefore an absolute must. In it you chart the impact of market developments on your finances. Based on this liquidity forecast, you can then determine your strategy.

Creating a liquidity budget, how do you do it?

A liquidity budget is a forecast of your cash flow. It gives you a monthly (or weekly) view of your expected cash needs. So you can see how much cash you have at your disposal each week or month. Whether you should make a forecast per month or per week depends on the level at which you want to have insight into your cash flow. When making the cash budget, assume your actual costs and expenses.

In a liquidity forecast, you make an overview of your expected income and expenses in the coming period. There are all kinds of software systems available in which you can track your finances. These give you easy, quick and real-time access to your financial data.

• At NOM, we have developed a Corona Impact Scan (CIS) for entrepreneurs. This scan gives you insight into your company's burn rate and runway.
• EY has a handy "Finance Navigator" that allows you to calculate the financial impact of COVID-19 on your business. Use of this tool is free for the first three months.

Create a liquidity forecast for three scenarios

It is wise to create a liquidity forecast for three different scenarios: a worst-case, base-case and best-case scenario. Before working out these scenarios, determine your "zero-based" budget. This budget refers to the minimum expenses you must incur to run your business. Be critical about which expenses are essential, and which expenses you can cut. Based on this, you will know the minimum revenue you need to cover expenses. This is your break-even point.

Then work out the three scenarios in which you compare your expected income with the necessary expenses. In doing so, distinguish between your fixed and variable expenses. The base-case scenario is based on your most realistic estimate. These are the income and expenses you actually expect in the coming months. In the worst-case scenario, you assume the most negative situation, where things are (even more) adverse. In the best-case scenario, you include the income and expenses you expect if the situation turns out to be better than expected.

From liquidity forecast to strategy

The liquidity forecast thus gives you insight into your expected sales and expenses, and thus into your cash flow. Based on this, and your possible financial buffer, you can estimate your liquidity needs for the coming months. Keep in mind a reserve buffer of at least three months with which you can pay your salaries, rent and other fixed costs without turnover.

With this information, you can begin to strategize in a focused manner. Include both an offensive strategy and a defensive strategy in your considerations. A defensive strategy is reactive: you will look at what you can cut back on to get through the crisis. An offensive strategy assumes attack. You determine what opportunities you can exploit, for example by investing in new markets, solutions and products. Innovation plays an important role here.

Solutions to cash flow problems

Whatever strategy you choose, chances are you will face financial challenges. If so, know that there are several options to temporarily alleviate your cash flow problems. For example, consider the following options:

1. Payment by debtors

Check whether your debtors are still able to pay their invoices. And make it interesting for customers to pay as soon as possible. For example, offer the possibility of paying in installments or give a discount if they can pay earlier. The latter may cost money, but it may provide enough cash in the short term. Also see if you can optimize your billing process, allowing you to send invoices faster and your clients to pay sooner. For longer assignments or projects, you could make arrangements to send partial invoices. Factoring can also be an interesting solution, so you don't have to take your clients' payment terms into account.

2. Reduce expenses

Consider what you can do to reduce your expenses (temporarily). For example, see if you can cancel certain contracts and subscriptions. But also think about personnel costs. Do you have flexible staff that you can part with temporarily? And perhaps there are business activities that you can put on-hold for the coming period or that you can outsource more cheaply. If the corona crisis leaves you temporarily without work for some or all of your staff, you may be eligible for the government's NOW scheme.

3. Arrangements with creditors

Find out what obligations you have to creditors and see if you can make arrangements. Think about your suppliers, but also your rent or mortgage, taxes, loans and lease arrangements. For example, talk to your suppliers about a possible extension of payment or payment in installments. Or perhaps you can reach new price agreements and negotiate terms of delivery. With your bank or investors, you could ask for a postponement of your loan repayment obligations. Banks have already made agreements to defer repayments. Many landlords are also willing to offer relaxation in rent payments at this time. Finally, the Internal Revenue Service has also made all kinds of arrangements to help entrepreneurs.

4. Inventory Management

Inventory costs money, so see if you can minimize it. If demand decreases, you probably don't need to stock as much. Perhaps you can buy less temporarily. Do make a good trade-off between what you expect to need during a given period and the cost savings you can make. And make good payment agreements with your suppliers. Furthermore, keep in mind that the corona crisis can also have an impact on deliveries and supply agreements with your suppliers!

5. Financial arrangements

The government currently offers several financial schemes to temporarily support entrepreneurs. These financings are intended for entrepreneurs who suffer loss of sales due to the corona crisis. You can find an overview of all schemes on the central government website. From April 29, 2020, startups, scale-ups and innovative SMEs can apply for a special bridging loan. This is the so-called Corona-Overbruggingslening (COL). An application can be submitted to the Regional Development Companies, which implement this scheme The Cabinet will initially make 100 million euros available for this purpose.

Funding innovation

Are you opting for an offensive strategy, where you want to innovate? Even then you may need additional funding. However, finding investors for innovations is a challenge in itself. In our white paper we have therefore listed what is involved in innovating and what funding is available.

At NOM, we like to think with you about the problems you are currently facing and what solutions are available. So would you just like to spar with us? Then feel free to contact us. You can find more current information around the corona crisis on our website.

Want to read more about innovating and funding for innovations? Then download our free white paper "From innovative idea to commercial product.