How to Avoid a Cash Crunch during the Pandemic

Date Published
July 06, 2020
For many businesses, keeping a tight watch on cash is key to surviving the COVID-19 crisis. Photo credit: iStock/Kong Ding Chek

Jong Hau cannot think long term yet when it comes to his family’s restaurant in Sarawak.

Joyful9 Restaurant reopened its doors in June after authorities further eased restrictions on movement in Malaysia, but sales remain low. Before the coronavirus disease (COVID-19) pandemic, the restaurant was averaging 1,500 ringgit ($350) a day in gross sales, but it’s now down to RM300.

“Customers are just not coming in,” says Jong, the restaurant’s captain, noting customers mostly order takeaways, but these do not make up for sales before the lockdown.

The restaurant must also comply with rules on social distancing, which reduces its seating capacity.

With sales down considerably, Jong says they just focus on keeping costs down to keep the business going day to day. “We have been looking at other restaurants and figuring out what’s working. But the market is really stagnant. No restaurant is doing well right now.”

When asked about plans for the longer term, he replies: “We’re not looking that far ahead. We’re just looking at the next 2 to 3 months.”

Small- and medium-sized enterprises (SMEs), which comprise majority of businesses in Asia, have been badly hit by lockdown and quarantine measures to stop the virus from spreading. Governments have rolled out fiscal and financial measures to backstop the decline in cash reserves of businesses, particularly SMEs. However, economies are just starting to reopen, and market conditions are far from normal.

Cash is king

“Unless they managed their cash well, SMEs are probably running out of cash by now,” says Protacio Tacandong, chief operating officer of Philippine auditing firm Reyes Tacandong & Co. and a past president of the Davao City Chamber of Commerce and Industry in Mindanao. Tacandong has been in the accounting profession for more than 40 years and has worked with SME clients over the years.

Whatever cash they have left will probably be used first for survival, to buy food and other essentials, for their family. “At this time of the crisis, the goal really is survival. The main priority is liquidity because in a crisis situation, cash is king. Those with cash will really be the ones to survive.”

Here are some tips Tacandong shares on how SMEs can avoid a cash crunch:

Take advantage of government aid and incentives

BIMP-EAGA countries have unveiled stimulus packages to help vulnerable sectors weather the crisis. Tacandong says SMEs should take advantage of financial support and incentives offered by the government so they can stay in business.

On the country level, the support includes low-interest loans, credit guarantees, and wage subsidies, among others.

On their own, some states in the subregion have come up with their own stimulus plans for SMEs. In Sabah, for instance, authorities are setting aside RM60 million to encourage businesses to go digital, while in Sarawak, the state government signed a deal with seven banks to provide interest-free loans to SMEs.

Maximize cash inflows

To ensure cash keeps coming in, Tacandong advises SMEs to collect receivables and prioritize collecting from customers with the highest balance of receivables. They can offer discounts, if necessary, to encourage customers to pay on or before the due date.

They should also reduce inventory by selling goods to priority customers on a cash basis. “They should dispose of their inventory as fast as they can even at a discount because that is sleeping money.”

If they have properties that are not being used and there’s a potential for a good deal, then they should also consider selling those.

He also presses business owners to constantly keep in touch with major customers on how they are faring and determine how else they could serve them.

To facilitate collection, business owners should arrange with customers for payment of accounts by bank transfer or online payment.

Business owners should also communicate with their employees about the company’s goals and direction and to seek suggestions on how to enhance revenue and expedite collections. 

Keep expenses down

To keep outflows at a minimum, business owners should negotiate payment terms for bank loans, or seek more time to pay loans. Ask for discounts and waivers, if possible, says Tacandong.

Seek deferment of tax payments or take advantage of extended payment deadlines.

Review all fixed costs and cut overhead expenses like power, water, and office supplies, says Tacandong.

SMEs should also ask for rental relief from their landlord during the lockdown period. Since most businesses continue to allow employees to work from home, they can also cut on rental costs by giving up some of their office space. “They should review whether they really need all the space they are renting.”

Consider reducing headcount by retiring eligible employees and offering separation packages for redundant employees.

If possible, cut allowances and benefits of the company’s top officers and lower employees’ representation and entertainment costs.

Figure out financing

For those running low on cash, borrowing will be necessary, says Tacandong. However, he warns that “screening will be much stricter and a bank would likely require collaterals and guarantees from major stockholders and owners. That’s going to be a challenge for SMEs.”

SMEs should also prepare for banks to look at their profitability for the past 3 years. They need to show their financial projection for the coming years and be able to establish the viability of the business.

He notes however that many SMEs have poor bookkeeping records. “Those SMEs who keep their books of accounts properly would have an advantage because the creditors would be able to review their past performance especially if these SMEs are audited properly by reputable accounting firms.”

Owners of SMEs with good standing in the business community will also have an edge, Tacandong says since banks also look at the business owners’ reputation and their relationship with other businesses and creditors.

They should also consider seeking personal loans if they need to infuse additional capital into the business, he says.

But Tacandong advises against borrowing from relatives. “To me, it’s bad business to lend to relatives because it might strain or even break relationships.”