Managing your business through a major cash crisis

by | Apr 10, 2020 | Advice to Directors, Alternatives to formal insolvency, Coronavirus | 0 comments

If your priority right now is to survive in the short term so that you hopefully have a business going in to the long term, this blog is for you.

Buying Time

In the short term, the here and now, the short-term survival of your business means taking emergency measures to:

  1. Retain; and
  2. Generate Cash in order to buy time so you can deal with longer term issues some time down the line.

Have these principles in mind throughout, in whatever you do.

Speed

Unfortunately, because you need to do this now, so very quickly, this might be before you have fully assessed the entire situation, had real time to assess all of the implications or formulate a fully detailed plan.  This may mean you may make some decisions and take some actions that you later regret, with hindsight, but you should not let that stop you making those decisions and taking those actions now.  Speed is the key.  Live with the fact you’ll not get them all right.  After all, if you don’t survive the short term, there will be no long term to worry about.

Short v Long Term

Ask yourself, does this decision have both short and long term implications?  If it has both, and you can afford to take a balanced approach that reflects both, then do so.  If you can’t afford a balanced approach, adopt the short term approach even if it is far more brutal.  If you’re unsure and can’t quickly eliminate that uncertainty, then adopt the short term approach.  Now is not the time for grey, ‘middle of the road’, wishy-washy decisions, now is the time for grabbing what certainty you can even if it hurts now or later.  For example if the option is to close a factory / unit – obviously a long term implication – or go out of business, then close it.

The 6 key components to Survival

These are:

  1. Get full control of the cash you have
  2. Raise some more cash from wherever you can – from normal trading and from outside of the business eg investors/yourself
  3. Cut the amount of cash leaving the business
  4. Cut overheads
  5. Improve your profits however you can
  6. Manage the business better

You won’t have time to do this all at once.  Do them in order of ease, speed and likely impact, from the one that can be speedily and easily implemented that has the most positive impact and downwards.  And keep squeezing the sponge, this is not a one-off exercise.

 

Component 1: Getting control of the cash you have

  1. Prepare a short-term cash flow forecast – for most businesses this means covering the next two to four weeks.
  2. Centralise, with you making the major decisions, the production of that forecast and the payment of suppliers etc so that you can then best direct your available cash to where it’s most needed or best utilised.
  3. Keep the cash flow up to date all of the time, report and learn the reasons for variances, act to deal with them and build those in going forward.
  4. Don’t let anyone other than you commit the business to any expenses.
  5. Ask yourself, is a particular site/factory/unit/part of the business haemorrhaging cash more than another /others? Deal with it.
  6. Extend your banking facilities. This means talking to your bank, however hard it may be to get in touch.

 

Component 2: Raise some more cash

  1. Identify and pursue all available government cash. Seek advice from someone who knows all about these.  Typically this will be your accountant.  If he/she is not supporting you right now, get support elsewhere.  Click here for my list of sites that might help you.
  2. Can you get better terms from customers or suppliers for whom you are key?
  3. Put some of your own cash in.
  4. Consider external funding sources – banks, existing or new investors, asset re-financing.
  5. Agree deals on any disputed or problematic debts which see you receive quick money even if you have to write off more than you’d really like.
  6. Do cash deals / give discounts for early payment.
  7. Identify and sell surplus assets / assets that will soon become surplus by working in different ways – this applies to machinery and stocks.
  8. Exercise stronger credit control.
  9. Identify other ways of selling your existing products / services and potential new products / services which there is demand here and now.

Where’s the lowest hanging fruit?  Pick it now.  Then the next lowest…

Component 3: Cut the amount of cash leaving the business

  1. Analyse all outgoings between:
    – those that are essential to survive right now (A);
    – those you’d like to do later on because they’re essential but just not right now(B); and
    – those that are discretionary (C).
    Prioritise in this order – A, B, C.  Defer B.  Cancel C.
  2. Take personal control of what suppliers get paid what and when.
  3. Go into a time to pay arrangement with HMRC, use the VAT deferral scheme.
  4. Dispose of or close down loss-making activities.
  5. Agree alternative stocking methods with suppliers eg consignment stock, work on customer purchased stock. Reduce your own paid for stockholdings.  Turn work in progress into finished good and not replenish it. Even think about returning stock to suppliers in lieu of debt.
  6. Defer loan/hp/lease/rent repayments by agreement.
  7. Don’t pay any dividends.
  8. Buy only the machinery you absolutely need here and now.

Component 4: Cut overheads

  1. Cut all non essential overheads, look for reduced prices for essential / inescapable overheads, look for alternative suppliers of essential services – now is a good time to shop around.
  2. Reduce your own and you co-owners’/directors’ pay / pay package. Do you really have to draw anything out of the business?  Reduce your personal living costs and thus your need to take money out of the business.
  3. Eliminate all advertising and marketing spend that doesn’t immediately bring in cash.
  4. Refocus your training spend on employee wellbeing and/or the skills necessary for the operation of the business here and now, not on normal times.
  5. Mothball your R&D.

Component 5: Improve your profits wherever you can

  1. Increasing sales means either or both increasing sales volumes and/or prices. What new products / services, or new ways of getting to the market with old products / services can you quickly create?  Can you sell additional products to existing customers?  Can you switch production into products/services needed to get us out of / support our key workers/industries through this crisis?  Will some or all of your customers stand a price increase?  Do you have to charge all customers on the same basis?
  2. Can you get better prices from customers or suppliers for whom you are key, with that extra money being used to support other aspects of the business? (NB be careful not to be seen to be profiteering).
  3. Don’t do unpaid work, even if there is a huge demand for it. Look after your own business first by focussing your efforts, resources and cash on those parts of your business that are both profitable and cash generative in the short term.
  4. Do you have any bottlenecks in your production / processes? Identify and eliminate them.
  5. Identify and eliminate unprofitable parts of the business / services / products.
  6. What overheads can you quickly cut? Look across every aspect of the business.  Note that in an acute cash crisis normally cost/overhead savings can be implemented faster than other methods of improving profits, like improving sales

Component 6: Manage the business better

  1. Ask yourself what you can do better, or quicker? What can your management and staff do better, quicker, and how?
  2. Improve the internal reporting of your key information, and how quickly it is offered up and acted upon. Ensure you receive cash flows, forecasts, p&ls, balance sheets, creditor and debtor ageing, and all other vital information necessary for your business regularly and on a timely basis.
  3. Embrace and quickly implement new technologies and new ways of working.
  4. Communicate more, and better, to everyone you need to, inside and outside of the business. Who are the people you really need to communicate properly with?
  5. Identify and look after your key staff, and have a plan for covering for absences. Identify and quickly deal with those who are not working hard with you, who are shirking – now is not the time to be dragged down by those not committed to the business.  Take best advice on HR matters.
  6. Ask yourself, where’s the business’ weak point? Try to deal with it as best you can.
  7. Be fair, be firm, be brave, be quick on all matters.

Anything else?

If doing all these won’t, so you think, save the business, rather than just close it, think about downsizing it as an alternative – reducing the size of a business will often reduce its outgoings / net cash burn, it might buy you time.

And if you can’t keep the business going, then do one of the following two things:

  1. Mothball it – write to, and call, the important people you need to in order to explain what you’re doing and why, explaining that you’ll get it back up and running as soon as things return to normal.But if you think it can’t be resurrected in or close to its current form later on;
  2. Close it down either yourself or by liquidating it.  Whether you can do it yourself or need an Insolvency Practitioner’s help depends on the circumstances.  Seek advice.

Good luck

Paul Brindley FCA, Licensed Insolvency Practitioner

10 April 2020

T: 07813 102014