What it means
During a lockdown, shops, restaurants, offices and venues may be closed or restricted to essential activity. Revenue can fall sharply and quickly, while rent, salaries, loan repayments and insurance continue.
The result is a cash squeeze that can threaten even profitable firms. Fixed costs are the key issue.
A business with high fixed costs and thin cash reserves, such as a restaurant or gym, burns cash fast when sales stop. Businesses that can move online or deliver goods, or whose costs are flexible, are better able to cope.
Finance teams respond in several ways. They calculate cash runway (how many months the cash will last), negotiate with landlords and lenders, apply for government support and reduce non-essential spending.
Common support measures include grants, wage subsidies, tax deferrals and loan guarantees, though what is on offer depends on the country and the time. Accounting consequences also arise.
Companies may need to test assets such as goodwill and property for impairment (a write-down when value falls below book value), reconsider whether the business can continue as a going concern, and disclose major uncertainties to investors. Lease and loan terms may need to be renegotiated.
A lockdown also has wider effects. Supply chains can be disrupted, customer habits change and some demand does not return.
Businesses that plan for such shocks with cash buffers, flexible costs and insurance where available are generally better placed to recover. Lessons from lockdowns have changed planning.
Many firms now hold larger cash reserves, negotiate more flexible leases and test their forecasts against a sudden loss of revenue. Boards also ask for scenario analysis showing how long the business could survive with sales cut by half or more.
In practice
Real-world examples.
Example
A gym with 2,000 members closes for eight weeks. It offers online classes and freezes membership fees for those who ask. Monthly revenue falls from $120,000 to $45,000 while rent and staff costs remain. The owner calculates that the gym can survive about four months on its reserves.
Example
A software firm operates remotely and sees little change in revenue. It does see delays in new client deals, because some customers pause purchases. The finance team updates its forecast and adjusts hiring plans. It also stays in close contact with its largest customers to learn when they expect to resume.
Example
A clothing retailer with 20 stores is forced to close them, so it moves stock to its website. Online sales rise but cover only a portion of the lost store sales. It negotiates rent deferrals and applies for a government-backed loan. The finance team prepares weekly cash reports for the board.
Formula
Calculation
Monthly net cash burn = Fixed costs - Cash revenue received
Cash runway (months) = Cash balance / Monthly net cash burn
A restaurant has $600,000 in cash. During a lockdown its fixed costs are $150,000 a month, and takeaway sales bring in only $30,000. Monthly net cash burn is $150,000 - $30,000 = $120,000. The cash runway is $600,000 / $120,000 = 5 months. If the owner negotiates a 50% rent reduction worth $20,000 a month, the burn falls to $100,000 and the runway extends to $600,000 / $100,000 = 6 months.Case study
Seen in the real world.
Marlowe & Finch Events is an illustrative, fictional company organising conferences and weddings. When a lockdown was announced, all events for the next four months were cancelled, and refunds of $350,000 were due to clients.
The finance director built a thirteen-week cash flow forecast within a week. It showed that the company had cash for about three months at current costs. She froze hiring, renegotiated the office lease, furloughed half the staff under a government support scheme and offered clients credits for future events in place of cash refunds.
By acting early, the company extended its runway to eight months and survived until events resumed. The story is illustrative, but it shows the value of a clear cash forecast and fast communication with lenders and landlords. Staff and clients appreciated the clear updates.
Watch out
Common mistakes.
- Focusing on profit and ignoring cash, when a business can fail with accounting profits if it runs out of cash.
- Waiting too long to talk to lenders and landlords, when early conversations usually give more options.
- Assuming demand will bounce back to previous levels as soon as restrictions end.
Questions
People also ask.
What costs continue during a lockdown?
Rent, loan repayments, insurance, subscriptions and, unless reduced, staff costs all usually continue.
What is cash runway?
It is the number of months a business can keep operating with its current cash at the present rate of net cash burn.
Can lockdown affect a company's accounts?
Yes, it can lead to impairment charges, going concern disclosures, changes to forecasts and different treatment of government support.
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