Creating a cash culture to help your business through a crisis
July 28, 2020
This pandemic is a crisis like no other in the past century and beyond. It is stressing every aspect of a company’s business model. Revenues are being slashed, profitability savaged, supply chains stretched and working capital pulled one way and another – all in a volatile and unpredictable commercial world, where official guidance and realities change almost by the moment.
In this new world of chaos, only one certainty remains: Cash is King. You are no longer running your business to generate profit. Your top priority is preserving cash so that it can be allocated between the many competing demands in such a way that your business emerges from this storm not only intact, but also ready to thrive in whatever the new normal turns out to be.
As you focus on cash, you must remember to think longer-term as well as about the day-to-day immediate challenges. It’s understandable to get lost in the moment, but strategic planning for the future must be a key part of your Cash Culture.
This brief guide aims to focus thoughts on those areas where cash can be generated and where it can be preserved.
The very first focal point in cash management must be your book debts. Sort out any disputes, which are holding up settlement of invoices even if it means compromising when you know you are in the right. Just issue the credit note and bank the cash. Where undisputed payments are overdue, it’s time for an adult conversation with your customer. If they don’t pay, you’re providing them with a free overdraft. It’s vital to sort out the difference between ‘won’t pay’ and ‘can’t pay’; you need to be firm and uncompromising with the former and try to work with the latter in as constructive a way as possible.
Everyone else is scrambling for cash. The rent strike by high street businesses is a prime example, where perfectly well-capitalised blue chip retailers have been attempting to help themselves to three month rent holidays, generally without any prior discussion. Don’t be a victim of that sort of behaviour if you can avoid it. Be wary of customers who are delaying your payments, but you know are settling other accounts. It may be worth talking to other creditors and suppliers so that you can all present a united front to a recalcitrant debtor.
Provided you have another buyer for the items, it may be worth offering to take back your products if it’s a genuine case of ‘can’t pay’. When it’s ‘won’t pay’, this tactic can be turned into a threat to collect them under the reservation of title provisions in your terms and conditions. You also have the statutory right to charge interest on overdue debts, which can be used to pressurise deliberate late payers.
Cutting out non-essential expenditure not only saves cash, but preserves profits. You need to analyse every outgoing in your profit and loss account and stop anything that can be halted without bringing your business to a halt, remembering only that there will be a future and some costs will preserve that without necessarily making an obvious contribution now. PR expenses are often at the top of a cost cutting hit list, but think twice: you need to keep your business and your brand alive and alight, certainly to existing customers and more generally in the public eye in some sectors, such as hospitality.
Stretch payments to suppliers and service providers if they will let you and preferably by prior agreement. You need to remember not to kill a vital part of your supply chain in the process or harm key relationships you will need when this crisis is over.
There’s an old adage: profits can be rebuilt, replacing people is much harder. The decision about which staff to keep, who to furlough and who to let go can only be taken on an individual business basis. Many people with whom you interact will remember how well or how badly your business behaved in this crisis, but none so clearly or personally as your staff. You will need supportive, committed people in the future, so make sure you take the best decision for both the present and the future.
Stock and work in progress
Review your inventory. Is its level still appropriate to your sales activity? If not, reduce it either by offering discounts to shift it faster or look for other routes to market to dispose of it. Your suppliers may even take back overstock if they have another outlet for it, unlikely as that might be in the present circumstances. If you don’t ask the question, you’ll never find out. Is inventory going to rise further out of line in future? Reduce or stop production or cancel orders from suppliers.
If you have part completed projects or contracts, check out if it’s worth completing them or not. Forget the profit impact; the only consideration is the straight cash benefit or otherwise, unless it is such a key customer relationship that the future will override the present
Sweating your balance sheet
Every business has surplus assets, especially in this crisis. A restaurant facing three months’ closure doesn’t need a well-stocked cellar, what it needs is cash to keep paying fixed costs. The wine can be replaced when it reopens. A struggling university having to repay millions to students who can’t get face-to-face tuition may have to swallow its pride, forget its heritage and sell property assets or even some of its art collection. The examples are legion, managers just need to set aside emotion and identify spare value amongst its assets, which can be turned into cash. Forget the book value, it really doesn’t matter if you book a loss on the sale.
The obvious knee jerk reaction is to cancel all future projects and halt even those already in progress. You need to sit back calmly and review every item of capex and future capital commitment, looking at three key aspects: the immediate cash outflow and timing; the future cash benefit and whether cancelling it will damage the future of the business. Weighing these will always be a judgment call, but please don’t sacrifice the future for the sake of saving a small amount of cash now.
Preserving existing funding
All lenders and credit insurers are extremely nervous at the moment. Just keeping your head below the parapet and hoping they won’t notice their exposure to you is entirely understandable but the wrong approach. You need to maintain an open dialogue with all funding sources and provide them with timely and meaningful updates about the state of your business. Most of all, avoid giving them unpleasant surprises and making last minute pleas for extra support.
Looking for extra funding
Before taking on extra debt, make sure that you can both service the interest and repay it. These are highly uncertain times, so how can you be sure what your future profit and cash generation will be? If you are looking for more equity finance, your existing investors will be by far the best option. They know you and you know them. However, if you are offered extra investment from a new source, beware the cash-rich vultures. Right now, they are circling many sectors looking for a cheap way into viable but overstretched businesses. Only you can know how big a share you are willing to give up in order to boost your cash resources and how much control you are willing to concede.
There are many government support schemes out there. At the very least make sure you know which you can access and understand the terms on which you will get help.
It’s all about communication
It’s not just your lenders and credit insurers you need to talk to in this crisis, it’s all of your key stakeholders. The more open you are, the better the reaction you will get back from customers, suppliers and most of all, your staff. The temptation is to circle the waggons, keep all the bad news secret and forget to trumpet your triumphs. That is entirely unproductive.
And last, but absolutely not least: Forecast, forecast & keep forecasting
Right at the start of the crisis you should have set up a detailed cash flow forecasting model. If you haven’t, do it now as a priority. It needs to reflect all the actions suggested above and in the current volatility, it should be set up on a basis sufficiently granular to allow you to monitor and control cash movements. Ideally, it should be a daily cash forecast, building into weekly summaries looking forward at least three months, maybe six.
It should be updated daily and lessons learnt from any major variances from expectations. This is a learning process, not an exact science. The forecast will always be wrong; the trick is not worrying about it but focussing on working out why and adjusting the company’s behaviour to correct or reflect it.
No cash management guide can cover every eventuality, especially in these unique circumstances. We hope that this provides a basic framework to which business owners and managers can add their own further ideas.