Importance of Cash Flows for businesses during the Pandemic
For the foreseeable future, it is visible that we will have a tough time as the pandemic will not end any time soon. Therefore, it is important for businesses to understand the importance of their cash flows.
Entering the third month of this pandemic, we can see that the global market has received a huge blow. There are many businesses that will not survive and the ones that will survive will focus on recovery, retaining their employees, and resetting the system. This will take a lot of time as sales revenue takes time to recover. Therefore, what can be managed for now is your cash flow. The need to control expenses, costs, debts and liabilities is of immense importance.
When we discuss direct costs, it includes goods for resale, people and raw material. These can be supervised by your teams; it is actually the indirect costs that are often overlooked. Most companies spend thirty to forty various categories of indirect costs, which does not seem like a big deal until all costs are combined.
Indirect costs have a lot of room for improvement. Although these costs are always on a Company’s to do list, they get overlooked due to other pending matters. Currently, the market favours the approach of focusing on the supply chain, adjusting, and tapering down cost profiles, and plugging unnecessary wastage of finances.
By looking from an indirect cost perspective, this is the best time to reset your company and bring about new changes. Let’s discuss a process that supports this idea.
Indirect costs: you should identify each supplier your business has. This is for the procurement team to do; usually while reading a spending report, they tend to overlook some details.
Supplier contracts: you should focus on having a contract with each supplier. What conditions have been applied? Are they on the CRM system?
Conserving opportunities on contract: is your contract based on volume or can it be changed? Things like credit insurance and energy costs also apply here. These factors determine your responsibilities and the other sides’ responsibilities.
Other than these, we have; authority, payment methods, cost conscious, supplier contingency, brokers, benchmarking against competitors, and quality. By following these steps, you will see significant changes in your cash flow.
Moving on, by saving additional unnecessary costs and using them somewhere more effective instead, can be of great help for your business’ stability. If a company decides to spend AED 10m per year on their averages and indirect costs, which is ten percent reduced costs, then that means a cash boost of AED 1m to valuable funds and net profits. If these funds are then used somewhere better, the company will see fruitful changes in no time.
Conclusively, it is highly recommended that you invest time, resources, and effort on your indirect costs’ base and carry out a cost reset. You will see how managing one part of your cash flow can strengthen your business.