“Cash is King” is potentially the most valuable adage for business owners at any time. However, it is even more critical today. This spring, we have seen an economic downturn with more speed and severity than any within at least 80 years. The intensity of this downturn has been heightened because revenues in scores of industries have gone literally to zero within a matter of weeks.
With no paying customers walking through the door, how is a business owner to manage cash in order to not only survive but to position him/herself to thrive during the coming recovery? Here are some suggestions about how to act.
Understand the Facts
The first task on your agenda should be an assessment of current cash position, sources of cash, and uses of cash. You should perform this analysis with “just the facts.” At this phase, just evaluate (1) how much cash is on hand, (2) potential sources of cash including accounts receivable and owner capital calls, and (3) a list of all uses of cash including payroll, vendor payment, rent, utilities, and debt payments.
You should create a running log of cash balance, week by week, or even day by day to understand how your cash flow decisions will impact your cash balance.
Prioritize Cash Flow
Now it is time to make hard decisions. Be prepared that you may not be able to meet all your short-term obligations. I would divide the obligations into past and future.
Past obligations are ones you have already incurred – payroll for hours worked, invoices due for product/services you are to receive. Future obligations – future payroll, rent, debt payments – are not yet due but are on the horizon.
I suggest that you start cutting back on future expenses as much as possible to match future expenses to anticipated future demand for services. This is likely going to mean a reduction in staffing first, as this is likely your largest expense. When determining a staff cutback, trim carefully and try to retain your most valuable team members even if that means that they adopt new roles in the short-term or take a short-term pay cut. And, remember, you should be cutting your pay first and further than any other staff member.
You make more in the good times and should trim more in the bad times!
After labor costs, work to re-negotiate all other future expenses, including rent, utilities, and debt payments. Ask for abatements, delays, opportunities for partial payments, etc. All these small adjustments will buy you more time.
Now that you have determined what the future cash outflows will be, you now understand how much cash you have remaining to settle past bills. You MUST pay labor costs, including benefits and taxes. This is non-negotiable. With remaining bills, I would suggest that you make partial payments on an extended schedule as most vendors will be happy that you are making a good faith effort to pay your outstanding obligations.
Open, Honest Conversations
Each step of this process is going to require you to have open, honest conversations with all your other stakeholders. When a business falls precipitously, there are going to be implications for everyone involved in the business. This means you may need to lay off employees, delay or limit vendor payments, make capital calls of partners, and halt capital projects. None of these are pleasant activities, but they are necessary for the long-term viability of the business.
The stakeholders will value your openness and your honesty about the situation. You don’t want to have the conversation any more than they do.
But it is a conversation that needs to be completed NOW! Delay will only make the situation worse and will cause anxiety and doubt from your partners.
I am happy to share more thoughts or discuss your situation in detail if you believe that I can help.