It is unusual for a small, growing business not to experience a period when cash is in short supply. In the past, I have had to dig into my own pocket to meet payroll on more than one occasion, so it's something of which I have very personal experience. In our current coronavirus pandemic, managing through a cash crisis is a skill that is not only desirable but necessary for the survival of many businesses.
There are five critical steps that need to be taken to manage through such a situation.
The first, if it is not already in place, is to institute a process whereby detailed rolling 13-week cash forecasts are put in place. Depending on the nature of the business and visibility of order input, it may be feasible to extend this to a longer period, but 13 weeks is a minimum if you're going to be able to take effective action. It is also important to "stress test" this forecast because – as we all know – the one thing that we can guarantee is that the forecast will not be achieved exactly.
Second: armed with this information, it will be necessary to prioritise and delay spending if possible (and it's always possible to delay cash outflows, it's the scale that is in question) and identify opportunities to maximise cash receipts. This also needs to be done with full knowledge of any debt covenants that may be in place or liquidation preferences (e.g. a landlord seizing property if rent is late) so that payments can either be prioritised or rescheduled with the agreement of the lender.
Third: develop an action plan to bring in cash and ensure that each action is identified to an individual. This action plan should be monitored daily with a meeting involving all those carrying responsibility briefing the CEO and/or CFO first thing each day. The objective should be to identify where additional support is required to meet the target or, if it becomes apparent that the target is unachievable, to develop workarounds. This is not necessarily something that involves the accounts/purchasing department alone. Indeed, it most likely will involve the sales team too because they have the relationship with customers and it may be possible to either get customers to accelerate payment or advance an order with appropriate incentives. It's also important that the right message goes out to customers in this situation – the last thing you want to do is to scare off new orders because of fears about insolvency.
It may also be possible to obtain government funding. Don't be shy - ask anyone and everyone about programmes available; your auditors/accountants will be a good starting place. . Also, don't overlook the possibility of selling assets. In most cases this will not be a feasible cash source, but it's worth considering if the situation is really critical (but be careful that, in so doing, you would not be breaking debt covenants or shareholder agreements).
Fourth, increase the level at which spending is authorised – if need be, the CEO and/or CFO needs to sign off on everything. And remember, it is the placement of an order or the decision to spend that needs to be controlled, not the payment of bills as they come in, which is a secondary control.
Fifth: communicate. The message needs to be broadcast within the business so that people are aligned with the objective. But more than this, it's important to speak to suppliers, landlords and likely shareholders depending on the capital structure as well as your bank or debt holders. You need to get them onside. If they are comfortable that you are proactively managing the situation, they will be more willing to extend credit or provide the support to get you through the situation. The worst thing that can happen is that you surprise them.
There is one phrase that sticks with me in situations such as this but it is a phrase that is equally appropriate in good times as well as bad – "Do what you say you will do". Ideally, that's exactly what will happen or you will surprise to the upside but communicate early if you know you are not going to be able to deliver on your promises, and communicate often so your stakeholders know where you and they stand.
If your business is delivering a product or service that has value and is needed, all stakeholders will want you to succeed. Bring them onside, make them part of your team.