Cash Flow Crisis - managing back to stability

Managing a business through a "cash flow crisis" requires skill, and a deliberate focus on the short-term scenario until the business is stabilised.

Caveat: This article is not for insolvent businesses. Insolvent trading has serious consequences which can include personal liability. In practice it can be difficult to judge exactly when the point of insolvency has been reached. If in doubt seek professional advice - the earlier the better.

Most businesses will experience some form of "cash flow crisis" at some time.

THIS REQUIRES FAST ACTION FOR QUICK RESULTS.

When faced with a short-term cash crunch, here's what to do:

1. Prepare a forecast.
It doesn't have to be pretty, or deadly accurate, but it does need to be fast. When cash is in short supply, time's your enemy, and delays in dealing with it can push a situation from tight to impossible. So it's essential that you have an accurate idea of where the business is now, and the cash flow projection for the short term.

What is "short-term" will depend on circumstances, and could vary from a month to a year. Although absolute precision is not needed, the forecast needs to be accurate enough to be realistic, and you should take a reasonable amount of time to get it right. (If the situation is already so urgent that you don't have a few days to do this, chances are you're already past the point of no return.)

Once you have prepared a basic working forecast, then change some of the variables in your forecast to get an idea of sensitivities, to pin-point the areas which have the largest cash flow impact. This will help to focus your attention on the business variables which matter most, and also give you the boundaries of best-case and worst-case scenarios to work with.

Preparing an adequate forecast in this situation is not always easy. A business which has arrived at a position of cash stress will often have done so partly because the sales and selling processes have been poorly forecast in the past. Nevertheless, it is essential that a forecast be forced into print.

This forecast won't just reflect "business as usual". Significant changes or re-structuring are likely to be required to stabilise the business, and modelling the potential cash flow outcomes is critical to moving on those changes with a degree of confidence.

2. Examine and extend creditors
It goes without saying that creditors provide the cheapest form of finance, however, there are few things you should do:

• Keep in mind the potential damage to future deals and your reputation if you extend payments beyond industry norms, or beyond previous arrangements - especially if you haven't contacted the creditors on an individual basis to let them know what to expect (see next point).
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• Identify key creditors who are strategically important to your business, and COMMUNICATE. If you expect delays in settling their account, negotiate your requirements openly, and then move heaven and earth to honour the commitments. Commitments given and honoured will usually give you plenty of brownie points for next time, and keep the key relationships intact.
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• Don't mess around with the Tax Office. The Tax Office has well-developed procedures for handling debt collections, and those procedures are slanted in favour of debtors who make arrangements ahead of time, and honour those arrangements. There will usually be interest to pay on deferred payments, but that's better than getting lumbered with penalties as well. Sticking to agreements will help your case if you ever need their help again.
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• Other key stakeholders to keep tidy include employees (for obvious reasons) and the landlord. Most commercial leases contain draconian provisions for late or non-payment, and will hand the landlord extraordinary powers (even though the exercise of those powers would normally be a last resort). Avoid this by negotiating specific arrangements and sticking to them. If given a good reason for a temporary deferral (such the delayed settlement of a significant contract), being proactive with the landlord can keep the relationship in shape.
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• If you have very long list of creditors, when cash tightens it's common-place for your accounts staff to be increasingly tied up on the telephone answering queries from creditors. Often a review of the creditors ledger will reveal a significant number of very small debts, collectively adding to a relatively small amount. If this is the case, you can slash the accounts staff work-load by paying out these small creditors immediately, whether they're due or not. Once they're paid the creditors' calls are reduced, and accounts staff can focus on servicing larger, or more strategic creditors.

 3. Cut back and control expenditures
Ruthlessly examine your cash flow forecast for any patches of soft or discretionary expenditure that can be deferred or cancelled. Sometimes refunds can be clawed back on deposits or pre-paid expenditure.

Review all expenditure approval levels amongst staff to move control to more senior levels where there is a better understanding of the cash flow impacts. This is an exercise of judgement, to strike a balance between the essential, the necessary and the indefinitely deferable expenditures.

Cost-cutting can often give rise to strategic issues which must be considered. For example, it seems that most businesses cut back on advertising, even though this is not always the best decision. The indirect or consequential impact of simply going for an easy target should be carefully considered.

The reduction of staff levels may appear to be a quick and simple way of immediately reducing costs, and sometimes this is unavoidable. If the level of activity doesn't support the current staffing levels, a view must be taken on how long activities will remain depressed. Apart from the purely strategic considerations, sacking long-term staff results in a loss of accumulated wisdom, and may also crystallise entitlements such as long-service leave, holiday pay and redundancy payments which could actually worsen cash flow in the short term.

Employee pay freezes or reductions are alternatives which, if successfully negotiated, can be better for morale than arbitrary sackings. Sacking a segment of your work-force can have a dramatic and demotivating effect on those remaining, especially if they are not all (and at the same time) adequately informed about the process before it occurs, and the reasons.

Appearances count too - if employees are asked to take a cut, while head office continues an apparently unrestrained lifestyle, then the job of selling restraint throughout the business is so much harder.

4. Debt collection
It's obvious that getting the money in as fast as possible should be a priority.

The collections record of your existing team should be critically assessed. If they're simply not up to the task of making a concerted, concentrated debt collection effort, then consider out-sourcing the tasks, or contracting a seasoned professional to get the job done internally. Outsourcing can be expensive, and they are usually unenthusiastic about the harder-to-collect debts.

Whichever method you use, construct performance benchmarks which match your cash flow forecast, and systematically follow up to ensure collections stay on track.

Most effort should be focussed on the largest debts and the relationships. Where necessary negotiate discounts for earlier settlement, but always with your cash flow forecast in mind.

Credit approval procedures for new and existing debtors should be critically examined, to avoid slack control over sales and inventory undoing the collections effort.

Invoice discounting or factoring is an avenue worth investigating, as it can bring forward cash flows from credit sales from 30 or 60 days to 24 hours. The cost is potentially lower than an early settlement discount. The process won't work for poor quality debts, and is essentially a "one-time" boost to cash flows.

5. Reduce Inventory
What can be done with inventory will depend on the business.

Slashing the stock-holding, (boosting the stock-turn) can release significant cash resources for businesses with a high stock value. This can be done by reviewing ordering and delivery arrangements, and maybe re-engineering the sales process. This requires careful thought, and the impact may not necessarily be immediate.

Other possibilities for raising (or freeing) cash fast might include returns to suppliers, or a clearance sale of slower-moving stock. Front-line sales staff are very often a fertile source of creative suggestions to package, or re-package products for a quick sale.

For some businesses, a weekend market sale (maybe under a different name) can be surprisingly effective in unloading stock which is simply unsalable when displayed in the showroom.

Once again, the potential strategic impact of any of these actions on the business's image and market positioning must be considered.

6. Bank Funding
At the time of writing, we're in the middle of a global financial crisis, and bank funding for SMEs has tightened considerably.

In general, it's better to be forearmed - in other words if you approach the bank for assistance at a time when your cash flows are under pressure, it becomes a lot harder to get their attention. Perversely, it's usually far easier to arrange lines of credit at a time when you don't really need it.

Any approach to the bank should be accompanied by a robust (but reasonable, and not-too-optimistic) cash flow forecast, and additional information which shows a significant margin of safety in servicing all borrowings, and ongoing business viability.

As always, real estate security is pretty much a given requirement, usually backed up with personal guarantees.

If appropriate, provide a well-prepared asset-sale profile which demonstrates an additional measure of cash flow security for the bank. The asset disposal may be a core objective of your cash flow forecast, or an essential "fall-back" position, should the trading operations not be sufficient to stabilise cash flows.

An alternative to bank funding which can be obtained at short notice, often without property security is debtor finance.

Conclusion
Dealing with a cash flow crisis requires flexibility, fresh-thinking, leadership, cooperation, and a determined mind-set. It's never easy, but the business which rolls with the punches can outlast its rivals, and be well-positioned to take advantage when market opportunities return.