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Cash Flow is Your Company's Financial Lifeline
When will life be normal again? And how can we possibly plan for “normal life” when we have no idea what will happen between now and then?
If your current worldview still has some flexibility, I invite you to consider the Stockdale Paradox. If you aren’t familiar, learning about Admiral Jim Stockdale is worth this quick read. It’s a mindset that requires you to be simultaneously optimistic and realistic. You know things will eventually be fine, but you don’t attach false certainty to when. Stockdale credits this approach with his literal survival as a prisoner of war.
For your company to endure this challenging time, you have to be optimistic that there will be an end to the pandemic and that your organization will be around to see it.
You also have to be realistic enough to deal with what’s happening in your world right now. And right now, COVID-19 is still very much happening. Therefore, your business must plan accordingly.
Planning for an Uncertain Future
It’s inevitable that the economy, and probably your company, will be dealing with the aftershocks of the pandemic for many months to come. If you’re going to be part of the economic recovery, you’ve got to keep your company alive until then. A vital part of enduring the next few months is ensuring that you get cash flow positive—as soon as possible—and have a plan to stay that way during the next several (likely difficult) months.
How many months? That’s the million dollar question. We are recommending that clients build month by month “pandemic” cash flow projections through October 1st. While there are no guarantees, we anticipate that most of us will be back to work by then—and we hope that it’s safe to do so much sooner.Your cash flow plan will be unique to your organization, depending on your ability to do business in the current climate; overhead and operational costs; and relief you may be getting from government assistance (although timing on that is unknown in many cases).
Key Considerations for Your Cash Flow Planning
Take the time to review your current operating expenses line by line. Make reductions wherever possible. This includes reducing surplus inventory, renegotiating contracts, and pausing subscriptions and other services you aren’t using right now. If it’s not a cost that’s imperative to your business, find a way to decrease or eliminate it.
Manage Cash Wisely.
Even if it’s atypical, expect to have issues with accounts receivable during the next few months. Vendors are pushing off payments whenever possible. Don’t rely on the “stability” of a well-established vendor relationship—make a plan to aggressively follow up on and collect your A/R. Identify any payments that you may need to write off as losses (but keep them to a minimum) to include in your planning.
If your payment model creates a disparity between your net profit and cash on hand, consider changing the way you do business. A “paid on delivery” model is ideal. It won’t help with payments you currently have to collect, but it can mitigate cash flow problems moving forward.
Bring Down Labor Costs.
It hurts to even say it, but laying off employees may be the right choice, especially if your business is non-operational because it can’t switch to an online model. A few thoughts on how to do layoffs with integrity:
--If you intend to bring your employees back, maintain open and honest communication with them. Tell them you love and miss them.
--If you don’t intend to bring certain employees back (i.e., if this layoff should have happened long before COVID-19), don’t give them false hope.
--Make yourself part of the equation. Business owners/partners should be taking pay cuts at a minimum. If you can personally afford to take no salary at all, do it. (This is not a practice we would ordinarily recommend, but these are extraordinary times. Your business will be remembered for how it handled itself during them.)
Payroll is by far the biggest expense for every organization I work with. If laying employees off in the short term helps the company survive, that’s a long-term benefit for everyone.
Note: if you’re private equity or investor funded, or if you have substantial cash reserves, you might choose to keep your employees on. Just be sure you’re aware of how depleting those reserves might affect the future of your company.
Don’t Count on Government Assistance.
What about the PPP, you ask? Consider all government help a highly hoped-for windfall—but plan so that your company can survive without it. The terms of various measures are still being clarified; many banks still aren’t set up to make loans; and plenty of companies still don’t have the promised cash in their bank accounts. It’s not about cynicism or politics—like you, we are very hopeful that the money will come. But the timing is highly uncertain. In the meantime, it’s up to you to take charge of your company’s own financial destiny.
Help & Support
What are your next steps? Here are three options:
Option 1: Get your own finance team on board with these considerations.
Take action wherever necessary to update your planning.
Option 2: Reach out to us for help, especially if you’ve got bigger issues with the finance function in your business.
Option 3: Connect with Steve Chunias (a BONUS option!).
Steve is the CFO at Silvercloud Inc., a longtime client that has handled the COVID-19 crisis exceptionally well. He’s offering support with SBA loan applications, bank covenants, reforecasting your year, cash flow planning, and staff reductions. No charge for his assistance. Big thanks to Steve for this generous offer. You can reach out to him directly at firstname.lastname@example.org.