By: Tom Bronson, founder and President of Mastery Partners
Cash is the lifeblood of every business. Cash is the blood that makes the body work. Cash is used to pay your employees, pay your vendors, keep the lights on, and ultimately keep the business operating.
If you were lucky enough to benefit from the PPP or EIDL loans from the SBA, don’t be fooled by your current cash balance. Those loans have lulled many business owners into a sense of complacency. Because of these loan programs, some businesses have more cash on their balance sheet than they have ever seen. That doesn’t mean that you can take a break from managing the cash.
In times like these, and indeed in all times, closely managing cash may be the single most important factor in running a successful business and maximizing business value. Many small businesses manage by the checkbook. While that method works in the short term – there’s much more to it than just checking your balance at the end of the month.
Well-run businesses measure cash very closely. In my businesses, cash was the first number I saw at the start of my day. Our CFO would tell me daily the cash in the bank, along with our receivables and payables balances. Did I really need those numbers every morning? Probably not – weekly may have been fine, but it helped me drive a culture that understood that cash is king. Cash management was and continues to be my daily blood pressure check – the numbers tell me if I need to just pop a pill, call the doc, or head to the emergency room with the paddles charging.
Here are 5 things business owners should take a look at to manage cash effectively.
Despite the cash infusion from the federal government in the form of various loan programs, it’s clear that the credit market is already tightening. We’ve heard just this week that some banks are asking for a 12-month cash projection in order to renew lines of credit in the future. Really? A 12-month cash forecast may be impossible in the midst of what we’re facing now with a global pandemic
Cash forecasting is important.
Cash forecasting gives you the ability to see problems long before they appear on your doorstep. Cash forecasting is a flexible model built on expected inflows (receipts and deposits) against outflows (payables, loan payments, payroll, rent, etc). Realistically, however, many small businesses do not actually do cash forecasting, and producing one may appear to be a monumental task to create from scratch. If you need a cash forecasting tool – just reach out and we’ll send you a foundational template that will help you predict your cash flow. No strings attached.
If you already have a line of credit (LOC) in place, we’ve been advising our clients from the early onset of COVID in the US to draw down their lines as much as possible. This ensures that cash is available. If you have not drawn your line, to the extent that you can, you should do so right away. Bear in mind that most LOCs require some form of borrowing base (the amount you can borrow against things like accounts receivable and inventory), so don’t break your bank covenants when you draw down the line, but borrow as much as you can.
You should also maintain an open dialog with your banker. Let them know what you’re doing, and keep them apprised of your financial situation. Most LOCs can be called (due and payable) by the bank if they have reason to believe that the borrower does not have the ability to pay back the loan. Maintaining that open dialog with your bank will help keep the relationship strong. After all – banks WANT to loan money. That’s how they make money — on the fees and interest. But, they will never loan money if they don’t believe it will be repaid.
Beyond the line of credit – there are other places to look to improve your cash position – chiefly in three main categories: Accounts Receivable, Accounts Payable, and Inventory.
Accounts Receivable – This is not the time to be timid about your cash collection efforts.
Most small businesses shy away from enforcing collection policies and procedures. Perhaps they are afraid to lose a customer or they think it appears too confrontational. You provided goods or services in good faith, after all, and you should be paid for your work. This is not the time to be timid about your cash collection efforts.
Many businesses don’t really have a formal collections process. If that’s you – now is the time to take action to develop one. While most small businesses take the position that their customers typically pay late (but they always pay), a better stance would be to examine your customer’s past payment history against their current payment practices. If they have always paid in 45 days, you should not hesitate to reach out with a phone call if they start paying later than usual.
While that approach is a band-aid, the better approach would be to reach out proactively with your largest clients to make sure they are sticking with their routine. If not, work out a payment arrangement in advance, perhaps offering an early payment discount. If they won’t agree to a payment plan, be afraid. Be very afraid. I’d rather lose a large, low margin customer now than write off a large bad debt later.
Use this opportunity to develop and implement a solid collection process, and stick to it. You’ll be better for it in the long run.
What is your relationship with your vendors?
Accounts Payable: If you’ve ever thought about asking for better terms or lower prices from your vendors – now is the time! If they won’t lower the price, perhaps they will grant extended payment terms. No one ever gets a discount without asking for it, and prices typically fall as demand decreases. You’ll have a better shot at getting what you want if you have historically paid your bills on time and have developed a good working relationship with your vendors.
Strong, open communication with your vendors, much like your banker, is key to getting concessions from them now. Like you, they are evaluating their customers to determine who is positioned to be able to sustain their business in uncertain times. If you don’t have a good relationship with your vendors already, you should cultivate one immediately. Otherwise, they are left to draw their own conclusions, which may not be the best outcome for you. Don’t forget, they can control your source of materials which could impact your ability to operate.
Business owners should focus on converting their inventory to cash as quickly as possible.
Determine what inventory you have on hand to fill existing orders, and get them out the door quickly. During good times, it may be wise to stockpile inventory at a discount to improve profitability. However, in times like these, converting your existing inventory to cash, and deploying a “just-in-time” inventory management practice (to the extent possible) ensures that you conserve as much cash as possible. Make sure your purchasing department is on-board with the new practices – you don’t want any surprises showing up on your dock.
You might also consider a fire-sale for slow moving inventory to convert it to cash. If you have dead inventory – get what you can for it and move on.
Manage your PPP.
If you were fortunate enough to get cash through the SBA Payroll Protection Plan, the only way to ensure that it will be forgiven is to manage it closely! Don’t assume it will just go away. The most recent loan forgiveness documents we’ve seen this week are significantly more onerous than the original application for funding. Ask your bank for their loan forgiveness documents now and make sure you’re using the cash according to the loan documents. When it’s time to submit the request (and your lender should be able to tell you when you should submit), do it quickly and accurately. You don’t want any portion of that potentially forgivable debt to convert to a long term loan.
So, tell me this.
How is your cash management?
How are you going to manage your cash more closely?
Do you need to evaluate your inventory, implement new collections processes, or reach out to your suppliers and lenders?
Do you have a cash forecasting tool, and are you using it to predict your cash flow?
