Cash is King!
If you didn’t realize that before the pandemic, in either your personal lives or at your company, more people certainly understand this adage now. Cash is King!
Without cash you cannot run your household and you cannot keep your business open.
The pandemic has made this a very real concern for everyone. Businesses are locked down so they are not able to generate the revenue to pay their expenses. As such many businesses have laid off employees, even if temporarily, to cut their expenses. And a record number of people have lost their jobs, even if temporarily, and as such they can’t even pay their bills.
Despite the numerous government support packages businesses, as well as individuals, need help on how to aggressively manage their cash flow just to survive this pandemic.
What are some cash management tips to help businesses manage their cash flow at this critical time?
The Harsh Reality
Social distancing and lockdown measures have shut many businesses and industries down. For those businesses that continue to operate many are just hobbling along, only able to provided limited services and ship a smaller number of goods through e-commerce channels only.
As the impact of the pandemic became more apparent the stock market crashed in anticipation of companies facing sharply declining revenues, huge losses, and perhaps even bankruptcy. One of the biggest indicators of the size of the impact is the unemployment rate. In the U.S. alone it is estimated that 30 million Americas will have applied for unemployment in a 6 week period. Those are historically unprecedented impacts.
Aside from the health issues, the underlying problem for individuals and businesses is cash flow. Whether at home or at work if there is no cash coming in then there is restricted, or no ability, to pay the bills that continue to come in. According to marketwatch.com the number of Americans who are living pay check to pay check is anywhere from 50% of people making less than $50,000 per year to 74% of all workers. The same article states that 3 in 10 adults have absolutely no emergency savings at all.
Businesses have the same problem. With no revenue coming in, or revenue highly curtailed, many businesses do not have the cash reserves on hand to survive the pandemic at least in their current form. They may become insolvent or at the very least have to fundamentally change their business model. One thing is certain: there will be a growing number of bankruptcies as companies won’t have enough cash to survive.
While unrelated to the pandemic my first baptism by fire cash management experience in business came after we acquired a company. The CFO informed me that the newly acquired company, held at arms length from the parent company, did not have enough cash. We had to make an immediate decision: pay our employees or pay our suppliers; we didn’t have enough cash to do both in the short term. That kind of Catch-22 decision, and all of the ensuing actions, really makes you appreciate the importance of cash management.
That is the harsh reality.
So what are some cash management tips that businesses can undertake to manage their cash positions more effectively to survive the pandemic?
Cash Management Tips
In order to manage cash flow you have to consider that there are two fundamental levers to be managed. First you have to manage the flow of cash into your company and second you have to manage the flow of cash out of your company.
Within each of these two flows there should be a small number of high impact business processes or metrics that you need to address, holistically, in order to make meaningful and significant improvements in your cash position.
This is a simple construct but it helps to characterize what type of actions you need to take. Simplifying the overall approach can help to dissect the problem into more manageable chunks. If you are looking to improve dozens of processes and metrics you will get stuck in the weeds.
You must identify a relatively small number of high impact process and metric levers. These different levers may also require different organizations and different areas of expertise to define, implement and track the various actions required underneath.
Managing the Inflow of Cash
If you don’t have cash coming into the company, while at the same time cash is leaving your company, most companies will run of out of cash really fast.
The first consideration is revenue generation. With the Coronavirus pandemic containment measures many businesses have been seriously disrupted if not shut down entirely. If your business is not considered essential you may be in real trouble until operating restrictions are relaxed.
Some companies are looking at how to reinvent themselves to generate some, if not more revenue. Distilleries are making hand sanitizer. Manufacturers are making components of, if not whole, ventilators. Clothing manufacturers are making masks, gowns, visors and other medical personal protective equipment (PPE). Airlines are converting passenger planes to cargo planes. And restaurants are selling ingredients and meal kits and not just completed meals.
Other companies are changing their channel strategy. If customers can not visit your establishment to purchase your goods and services you need to adapt. The obvious consideration is entering or expanding your online e-commerce presence. Customers can still buy your products online.
The delivery option to get products to your customers can also change. Restaurants are using drive throughs or having local pick up or delivery. Other stores allow you to order online or over the phone for either pick up or delivery. Social distancing can still be maintained, protecting your employees and your customers, while you still conduct business with various delivery channels.
Companies must also consider options for pricing and discounts. If you have finished goods on hand in inventory, sitting idly on warehouse shelves, you may be best served to sell those goods at a lower margin in order to generate revenue.
You may also have idle raw materials or components sitting in your warehouses which you can’t convert into finished goods in the short term. Perhaps there are customers for those raw materials, even if they are the suppliers you bought them from, who would be willing to take these goods off of your hands. If so that is another cash creation stream.
Beyond that you may have to rethink and redefine your business model. We don’t know how long the pandemic restrictions will last or whether they will be reinstated if there is a second or third wave of the virus. The pandemic experience may result in their being a new normal for our personal lives and our businesses. Rethinking your business model to make it more resilient and better able to withstand future disruptions will help ensure continued revenue flow and better solvency.
Depending on your business model you may also have to manage Accounts Receivable. Your customers will also be under cash pressure and they be less able, if not unable, to pay your invoices. Their inability to pay you for goods and services you have already delivered leaves you in the position of having incurred the expense but without the commensurate compensation.
Your Accounts Receivable team will be walking a tightrope of some kind. They need to be somewhat aggressive in pushing for payment from your customers. But if they are too aggressive they could push your customers, and your future revenue stream from them, into perilous waters. But you need your cash so tact and diplomacy, along with a well though out A/R strategy, are necessary in these trying times.
While looking at ways to generate more revenue for cash inflow, your other options include looking for a cash infusion, even if this is just a short term stop gap measure. This could come in the form of loans or lines of credit which are more attractive given the currently low interest rates. Government stimulus programs may be of assistance. Alternatively you could seek out other investors for your business.
Bringing cash into your business is an unavoidable necessity. If you don’t have cash you can’t pay your bills. And if you don’t pay your bills long enough you won’t have a business. In all likelihood you will need to pursue multiple avenues for bringing cash into your business.
Managing the Outflow of Cash
In parallel with your efforts to increase the flow of cash into your business you must also look at ways to reduce the flow of cash out of your business.
One of the largest expenses for many companies is labour. Layoffs are a reality especially for those businesses that are locked down entirely. As mentioned earlier 30 million people in the U.S. have filed for unemployment in 6 weeks. It is clear that companies are exercising this option aggressively. Additionally freezing or reducing salaries or freezing hiring will stop expenses from increasing for the time being.
All expenses must be reviewed to see what costs can be cancelled or at a minimum deferred. Travel expenses for instance have plummeted as airlines have shut down passenger travel and companies are using online meeting software. Every expense should be considered discretionary. If necessary spend approval limits should be increased to raise visibility before any expenditure is approved.
Capital expenditures and investments are also large candidates for postponement or cancellation. Even purchases previously considered as low level capital expenditures, such as basic office equipment or supplies, should be elevated in visibility prior to any spend being made.
Inventory levels should also be reduced. This requires a review of the days of supply on hand and on order for every sku. Purchase order quantities may have to be reduced or cancelled altogether. Return privileges should be reviewed to identify all options for sending inventory back to suppliers. Inventory reduction may also allow you to reduce carrying costs, storage costs, and handling costs.
Accounts Payable management is also a critical part of your cash management strategy. You should ask suppliers if you can defer payment or get concessions of pricing for unpaid purchases. Your Accounts Payable team is dealing with your supplier’s Accounts Receivable team so be prepared for them asking you for payment in accordance with current terms. This can also be a sensitive discussion requiring a previously considered strategy and plan of attack.
Cash Management Tips in Conclusion
Cash is King! You must think Cash, Cash, Cash!
If you didn’t realize that before you most certainly realize that now. As such you must take specific and definitive action with cash management tips to sustain a level of cash flow that will allow your business to survive this pandemic. Furthermore, having a good handle on your finances will help you determine how much your business is worth, which is very important if you want to sell your business in the future.
Your cash management approach should not be one dimensional. You can’t focus on just generating more revenue or just cutting expenses. You must look at all dimensions holistically and simultaneously as we’ve discussed with our cash management tips.
You should also communicate the need to focus on cash flow with every employee. Employees will have their own great ideas on how to improve cash flow. Further if your employees are aligned with you and understand the importance of cash management they will move heaven and earth to make the changes needed to support cash flow improvement.