Two areas of financing central to business operations include effectively managing accounts receivable/payable and converting fixed costs to variable costs.

Let’s explore how strategically approaching these two areas can help mitigate loss and increase opportunity to drive capital during this uncertain era.

Facing an economic downtown and communicating with clients

The global economic meltdown caused by the coronavirus requires businesses to recognize how their accounts receivables accounting line will be affected. Working with clients on account terms can be more risky than dealing with them on a cash-as-asset basis, but most small and medium-sized businesses (SMEs) lean towards that long-term contractual relationship. Why? Because trust is a critical part of business partnerships.

But what happens when a client can’t pay within the terms that were commonplace pre-pandemic? A rigorous collection process has to be in place, and often that system begins with openness and transparency.

“Everyone is going through a lot of stress due to COVID-19,” says Shawn Mevel, Director of Sales at ATB. “How you deal with a client who has cash flow issues and can’t pay for your product or services within a certain time frame comes down to clear communication. Be clear to your client about how payment delays can impact your own business.”

That conversation may involve term negotiations, which are common when a recession or sudden emergency strikes. Mevel notes that if a business owner had 30-day accounts receivable terms for a client, extending them to 45 or 90-day terms can give anxious clients more breathing room.

“Come from a position of understanding, and hopefully you won’t have to go the legal route,” Mevel notes, remarking on the last resort of filing claims against clients who don’t pay at all.

What could also be viable is laying out terms where payment comes in chunks, such as 25 per cent within 30 days, another 25 per cent 30 days later and the final installment being paid 45 days afterward. Then, at the very least, all parties are on a schedule that keeps that relationship strong and cash flowing smoothly.

Advice on hard choices to manage accounts payables

On the other side of the coin, a business owner may be struggling to pay their bills and may require the compassion and leniency of those they owe. Smartly managing accounts payables should also be prioritized during lean times.

A Deloitte report suggests that one way to preserve working capital is to “take longer to pay your suppliers. Some companies may unilaterally decide to delay their payments and force the extension on their suppliers, especially when stuck with inventory they can’t deliver into impacted margins.”

It should be noted that this kind of approach can bruise supply relationships, so, openly communicating the proposed new terms may help maintain the business relationship that was established before the pandemic.

Another priority is actively engaging with financing partners to ensure available lines of credit remain accessible.

“In times like these, understanding your cash flow cycle is more important than ever,” Mevel says, “so if you’re new to all this, or need help, definitely talk to your banker.”

Turning fixed costs to variable costs

Every business owner has two types of expenses:

• Fixed: Do not change based on production levels. These often include costs such as rent, insurance, payroll and more.
• Variable: Change in proportion with business activity or product volumes, or which directly depend on the volume of sales or production.

Due to a downturn in sales and perhaps even having to shut down a bricks-and-mortar operation, today’s businesses could significantly benefit from shifting some fixed costs to variable.

One consideration is that SMEs may begin to assume they no longer need variable services during these challenging times and, as a result, eliminate those expenses. These may include an expense such as purchasing assets, which Earl Caron, Managing Director and Head of Capital Asset Finance and Business Development at ATB highlights as a front-burner consideration.

“If you need equipment these days, consider renting rather than buying,” he says. “Sure, in the long-term it may be cheaper to buy, but in the short-term, if cash flow is an issue, buying might not be the best option.”

Every piece of equipment bought can eat up profitability, Caron says. And a business may want to think about selling certain assets, “as long as you don’t get 10 cents on the dollar on those sales,” he adds.

Rent is another sticky issue for business owners during such cost-cutting months. An informative report from Toronto’s MaRS Discovery District suggests checking the expiry date on lease agreements and beginning “conversations on your cash-flow challenges with your landlord. Then review the trial balance for any expenses associated with storage or other locations you no longer need.”

Reviewing any retainer-type relationships with fixed monthly costs (e.g., public relations, lawyers, accountants), and having open discussions with all of them to assess your unique needs during this time, could be another opportunity to shift expenses from fixed to variable.

For example, some public relations firms may charge on performance rather than the typical fee basis. Going this route could be beneficial, but it’s important to spell out what this performance-based agreement looks like, laying out specific accomplishments and their exact costs.

“With so much revenue falling off a cliff, businesses have to do what they can to control their cost structures,” says Caron. Being resilient and agile about a business’s cash flow today could set up the company for a much healthier tomorrow.