If you’re like most entrepreneurs assessing the current economic landscape, you are sheltering in place and have several competing priorities. While all these issues are important, your highest priority is having a granular, specific, up-to-date understanding of your cash position. Not growth, not adding new customers, not profit… cash. Profit does not equal cash because you can’t spend profits. It’s possible to have $200k of profits and no cash (maybe a customer hasn’t paid yet), or $200k of cash and no profits (perhaps you’ve not paid a bill yet, or you’ve just borrowed money). Extreme, tactical management of your cash flow is the only way you’ll stabilize and save your business.
I’ve already seen a dramatic shift in the investment community moving from an obsession with income statements, revenue, scalability, and profits to an emphasis on cash, cash reserves, cash flow, debt, debt-to-equity ratios, and free cash flow. They are mainly focused on how your management team effectively preserves dry powder.
If you are already suffering, my intuition is that you already had a weak balance sheet and cash flow before COVID-19 became a pandemic. Even if you’re not suffering, you need to assume that things will be worse than you think. Even if the quarantines stopped today, the impact on your customers as they “pick up the pieces” and resume normal operations might last six months. Your 2020 budget is irrelevant, and your strategic plans won’t get you through this economic crisis because you have no control of our government’s response, the length of quarantines, or Wall Street’s reaction to COVID-19.
So let’s focus tactically on the problems you can solve that improve the odds you will live to fight another day. It starts with creating a rolling 13-Week Cash Forecast consisting of:
- Your beginning cash balance
- Projected sources of incoming cash (which would include cash sales; collections on receivables; the cash proceeds on the sale of property, plant, or equipment; money raised from banks or lenders, etc.). This would include any cash deposited into your bank account.
- Projected uses, payments, and expenditures of cash (which would include all bills paid, purchases of inventory, deposits paid, loans repaid, or accounts payable paid, etc.). This would consist of any cash spent or disbursed out of your bank account.
- Your ending cash balance
You will be maintaining this as a living forecast (each week roll all your weeks forward one week. The old week two will become the new week one. The old week three will become the new week two and so forth). Give yourself some extra space to added items as they come up. Do not show just one line for “accounts receivable.” Instead, list the customers who owe you money and estimate the amount you think they will pay in the appropriate week’s column. Do the same for every payable. You need the detail to determine who you’ll pay, who you’ll defer, and what is renegotiated.
Now you have a planning tool to get to cash neutral quickly. Now is the hardest but necessary work if you want to survive. You need to be aggressive, targeting up to 50% of your expenses. Ready?
- Aggressively go after account receivables. Give discounts for early payments.
- Be ruthless regarding expansion, growth, or Cap X plans/expenditures that can be delayed
- Only focus on marketing that measurably produces the highest ROI. Defer everything else.
- Do you have any unused assets that can be converted to cash?
- Push out payables as far as possible without incurring penalties or fees. Try to renegotiate terms with every vendor proactively. Trust me; they’re expecting these calls.
- Wages need to get aligned with current revenue. Lower the management team’s salaries immediately. It’s difficult to justify the next steps if you’re not willing to be the first one impacted. We cut everyone by 50%.
- Evaluate staff and cut deep (much deeper than you are comfortable) but only cut once. Nothing is worse for morale than repetitive layoffs.
- Consider furloughs when appropriate—research applicable laws, especially when furloughing salaried employees.
- Convert your fixed cost to variable cost whenever possible. Are there employees that can be converted from salary to hourly? Can you expand/contract the hours they work as needed? Are there positions better served with contract roles where you can efficiently manage capacity?
If you can’t create a plan that sees you through the next 3-4 months, then you will need to “sharpen your pencil” and make further adjustments. The hardest expense to deal with is payroll, which, if you are like most, is your largest expense. The temptation is to envision what you will need when the crisis over and the recovery begins. The other impulse is to fund everyone as long as possible or to enact an across the board 25% reduction in wages. This isn’t the best approach since you have no idea how long the crisis will last. A rule of thumb I use:
- Protect the ones that can provide the best leverage now and when things turn around, even if you need to redeploy them temporarily. Reduce the salaries of the middle tier and eliminate the bottom.
Remember, once the money is spent, it is gone forever. This too shall pass. Use extreme tactical management of your cash to get to the other side.
Stay healthy. Stay hopeful.