Businesses need to take instant action to prevent cash-flow insolvencies in the midst of COVID-19.

(Annie Spratt/Unsplash)
Matthäus Tekathen, Concordia University
These are tough times for business owners due to the COVID-19 crisis. Experiencing substantial declines in sales or even a complete suspension of operations, they face cash-flow insolvency threats.
Indeed, a recent survey of small Canadian companies by the Canadian Federation of Independent Business found that 30 per cent won?t be able to keep their businesses afloat for more than a month if current conditions remain. Why"
The immediate problem
When sales drop, the cash wheel, whose function is to generate the required liquidity to operate the business, slows down or even comes to standstill. See below: Cash flow wheel.

(Matthäus Tekathen), Author provided
The more sales drop, the more the inflow of operating cash dries up. If business owners cannot slow down, at a similar speed, what are known as cash outflows ? payments for salaries, raw materials or merchandise, supplies, interest, rent and the like ? eventually cash reserves and subsequently credit lines will be used up. A cash-flow insolvency ensues.
?No sales without costs?
Business owners know well: No sales without costs.
A retailer needs to purchase merchandise to sell it. That costs money. But unfortunately, the inverse ? ?no costs without sales? ? usually does not hold. Why" For two reasons: fixed costs and a time delay.
Conceptually, ther...