Jones Partner

Why strong emotional cashflow is critical for success

21/07/2020 by Bruce Gleeson

Covid 19 was first confirmed in late January 2020. Subsequently on 20 March 2020 restrictions such as the closing of our borders and social distancing were introduced. Since these restrictions were introduced, I have read and listened to webinars regarding the importance of cashflow for a business and household during and coming out of the pandemic. OK – but what about emotional cashflow? What is your current level of emotional cashflow? Why is it important for small to medium enterprises (“SME’s”) and households?

Firstly, let’s not discount the concept of cashflow itself. Cashflow relates to the increase or decrease in the amount of money a business or household has. The old adage “cash is king” highlights the importance of it and that it is the lifeblood by which the business or household can function. As a keen share market follower, one of the things I hear emphasized constantly by investment managers is their focus on the strength of cashflow generation by a business and how critical it is.

There is little doubt that during Covid 19 many SME’s and households have had their cashflow significantly impacted and that it may persist for some-time yet. I will revisit cashflow towards the end of this article with some management tips.

But what about emotional cashflow?

Over the twenty-five (25) years that I have been advising on all forms of insolvency and bankruptcy, restructuring and exit planning, one of the key questions I ask the individual or SME owner is:

“What do you want to do going forward?”

You see it doesn’t really matter if I can formulate a viable strategy for them to continue in the present business or position (albeit with some structural changes), the chance of it being successful if they are emotionally out of cashflow (or spent or tapped out) is quite low. This is particularly prevalent amongst SME’s and households because typically they are trying to do all the heavy lifting themselves when the going gets tough. This is where Covid 19 is likely to have a profound impact on them compared to bigger corporates and listed companies.

Whilst bigger companies will also have operational and funding issues to deal with, they typically have access to more resources, both internally and externally which enables them to better react and formulate a plan to get through to the other side. However, the SME or household generally shoulder that burden themselves. That becomes emotionally exhausting. The longer the situation continues, their emotional cashflow becomes seriously depleted. Stressed SME’s and households tend to make poor financial decisions. I believe that during and post Covid 19, the depletion of emotional cashflow will be felt by a higher number of SME’s and households as the true economic impacts start to be felt.

Whilst the stimulus put in place by the Federal and State Governments has fulfilled an important role, it will not continue forever and the kicking of the can further down the road is more likely to see a notable impact on the level of SME’s and households in financial difficulty. Indeed, what we do know is that during the June 2020 quarter the level of corporate insolvencies and personal bankruptcies are BOTH down on average by approximately 40% when compared to the June 2019 quarter. This is hardly surprising given the stimulus, debt deferrals, trading whilst insolvent exemption in place until late September 2020 (and may possibly extended until late December 2020 based on current lobbying). But there will most definitely be a catch up.

What makes this pandemic different is in previous economic challenges (think Global Financial Crisis), the Federal Government did not adjust aspects such as temporary relief for insolvent trading, debt deferrals, and temporary increases in debt recovery thresholds and timeframes.

For some SME’s depending on what industry they operate, the pandemic has caused changes in purchasing behaviour – some of which may be permanent in nature or at least quite long lasting, for example 2-3 years. SME’s need to carefully evaluate what some of these trends mean for how they currently operate or otherwise pivot to ensure they can be viable moving forward.

With continuing uncertainty as a result of further outbreaks or clusters occurring, the pandemic serves to act as a handbrake on properly getting the economy going. No SME or household copes well with on-going uncertainty. But I firmly believe that looking back in five (5) years’ time, that not only will the current crisis be behind us, but we will also have a better perspective on it than we do presently.

Arguably, with so much information available, one could say it is all in front of us, but even for professional advisors, it has been challenging to keep up with the constant release of information pertaining to the pandemic. It is easy to feel overwhelmed by the amount of information around.

My key message to SME’s and households is that you don’t have to travel down the highway alone. Don’t wait for the stimulus to stop. Engage with a qualified professional if you are unsure about your financial position.

A point on managing cashflow – the lifeblood. Ask yourself these questions:

  • Do you have a cashflow plan? If not, prepare one (or get some help) on the basis of the information presently available to you. Be conservative and ensure you factor in ALL expenses.
  • Actively manage your Accounts Receivable (customers that owe you money) and understand (or get some help) the debt recovery options.
  • Actively manage your Accounts Payable (suppliers including the TaxMan) and take full advantage of creditor payment terms and use EFT to make payments so funds stay with you as long as possible. And if you can’t pay, communicate with your suppliers so they are aware of the present position.

Finally, and going back to emotional cashflow, do you have a plan or routine to manage your mental health? Arguably such routine has been impacted by Covid 19. Work out what adjustments you can make so that you are still taking care of this vital aspect. As part of this plan, acknowledge and be at ease in knowing that it is perfectly OK to reach out and seek help from qualified professionals if you need help regarding your financial position.  

Bruce Gleeson, FCA, FCPA, RITF
Principal, Jones Partners Insolvency & Business Recovery