Reflections on Cash Flow in the Time of Covid-19

In response to multiple calls from customers and friends about what to do and how to deal with the current situation in their companies and businesses, received during the last two (2) weeks, after the Government decreed a State of Emergency, on March 13, 2020, I will share with you the following note with my thoughts on the matter.

The note, does not pretend to be an essay on how to manage the finances of a SME in times of crisis or an exhaustive article on cash management, simply, the note seeks to answer some of the questions received and propose alternatives, based on my practice of thirteen years as a consultant to companies on financial issues and see how clients have faced the various crises that have occurred.

1. Stay calm. This is going to happen. If you don’t control yourself and succumb to the pressure imposed by the situation, the concerns resulting from the news, the uncertainty, etc. you will most likely make bad decisions or worse, not survive this crisis (at the time of finishing this note, I have heard from 2 acquaintances who have suffered cardiac episodes due to the desperation caused by the current situation).

2.     Evaluate your situation. Is it serious? Do you have the resources (financial, administrative, alliances, contacts, etc.) to enable you to endure? How long can you endure? What do you need to do to endure? Relieve (reduce) your administrative or organizational structure (personnel, services, etc.)? Is it necessary to rethink your business model? What changes do you need to make in the immediate future that do not involve investment? Last but not least: do you know what information you need to decide? Do you have this information right now? How can you get it/generate it immediately? Remember, the solution and the decisions you make, good or bad, will depend on how informed you are about their impact on your financial position, and this in turn will depend on the quality of the questions you ask and the internal information you have.

3.     Determine what your options are. Identify possible scenarios. This does not mean that things will happen as you have foreseen, but it will help you identify the main variables to consider in each alternative and thus anticipate and be prepared for what will happen if things move in one direction or another. The best way I know to do this is to model or simulate the possible scenarios using a cash flow matrix in Excel.

If you are not familiar with cash flow, now is the ideal time to learn how to use this tool. Below, I propose a format and try to explain as simply as possible, how to use it:

4.     Analyze your cash flow and project the course of action you consider most feasible. In a situation like the current one (and, in fact, always) it is necessary to know the financial impact that any decision and/or action may have on the company’s liquidity. Remember that companies do not go bankrupt because they are not profitable, but because they lack liquidity.

In the current context, suppose that sales revenue fell 85% of the budget in March, 100% in April and May respectively (i.e. 0 sales in these months), and began to rebound slowly from June onwards, and that, over the whole of 2020, the loss of revenue represented a 50% fall in the annual budget. What would you do as the owner and general manager of your company?

If you are not familiar with cash flow I suggest you take a look at the weight of each cash outflow line. In the example (whose figures I have exaggerated for didactic purposes), the most important outflow is the personnel expense that represents 48% of the total cash generated by the company annually, followed in importance by occupation costs 15%, other cash outflows 15% (mainly, the payment of the principal of a loan), financial and tax expenses 10% (payment of interest on the loan), and so on.

It is precisely on each of these items that you must act as owner and general manager. If you anticipate a drop in income as mentioned above, which practically means the closing of operations, it would not make much sense to keep one hundred percent of the staff on the payroll and continue to pay them month after month as if nothing had happened. Consider as established in executive decrees N° 81 and 507.

In its first article, Decree No. 81 recognizes the existence of the pandemic caused by Covid-19 as a cause of force majeure and the consequent declaration of the State of National Emergency. In its second article, it establishes that those companies whose operations have been closed in accordance with the preventive measures ordered by the government authorities within the State of National Emergency, the contracts with their workers will be considered suspended from the date on which the closure was ordered and that said suspension has been authorized by the General Directorate of Labor (or regional directorates) of the Ministry of Labor.

Within this context, and after having carefully evaluated the situation of your company (an organization whose economic activity according to the example is labor-intensive), you should consider: What part of the personnel will you maintain during the time of the crisis ? Is it viable to keep the sales force at this time? To all the administrative? Is it possible to temporarily reassign functions (multipurpose staff)?

Regarding the occupancy costs, the main items that comprise it are rent and electricity. In this regard, consider the possibility of approaching the management or tenant and obtaining a temporary waiver of their payment or reaching an agreement or negotiating a payment arrangement. For its part, the government announced measures to lower the energy rate (30%). It would be necessary to know from when and if a temporary exemption is possible while the operations are closed.

With regard to financial obligations, consider the possibility of deferring the payment of bank charges (debt payments: principal and interest, for the use of credit cards) and interest expenses on loans and payment of the principal, in light of the arranged by the Superintendency of Banks and the banking entities with which you work (especially, see if the interests will accrue or the conditions that will govern for this purpose).

These are just some ideas (not an exhaustive list) of the possibilities and alternatives that can arise from the detailed analysis of the cash flow by you and your work team to face the current situation. Keep in mind that everything proposed above has the primary objective that your company immediately survive the crisis caused by Covid-19 and its economic aftermath, and thus ensure in the medium and long term support for yourself and your family. , and all or most of its collaborators.

We live in a critical situation in which it is imperative to be resourceful and look for the best alternatives that allow our companies to survive. If you achieve this goal, at the expense of the losses and / or extreme measures that you must face in the short term, you will be closer to ensuring the well-being of your company in the long term.

Finally, keep in mind what Moses commissioned Joshua before dying and Joshua leading the entrance of the people of Israel into the promised land (Deuteronomy 31: 6): “So be strong and courageous! Do not be afraid or panic in front of them, because the Lord your GOD, He Himself will go before you. It will not fail you or abandon you ”.


Luis Ernesto Gonzalez
Client Relationship Manager

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March, 2020

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