Cash is King

As a board member of many start-ups, I have had to deal with numerous situations where cash flow is not sufficient. It can be very painful to really grasp the issue and make significant changes but it is absolutely necessary to do just that in situations such as we are all experiencing right now. Often, people think it "will be alright" - and then by the time it is realised it is not going to be alright, it is too late to act adequately. You will have to set yourself and your staff strict guidelines as to expenditure - and it will be up to you to make sure that these rules are adhered to. Those companies that took action early on to survive a recession, are able to emerge from it stronger then they were before. Looking at the current "financial crisis" - all of the tips and things we employed during those periods I personally experienced, now come flooding back and I wanted to use my blog to share these with all of you. First and foremost - remember that "Cash is KING" That means you have to contol both ougoing cash as well as incoming cash. On Outgoing Cash * Don't commit to any obligations right now, not until you know what is going to be happening in the financial world; * Keep your costs and expenses variable, the less you have fixed - the more flexibility you have; * No Payment should ever go out withour your express approval; * Don't go to expensive restaurants, but invite your contacts to your office and have lunched served there; * Try conference calls, or video conferencing instead of flying to every meeting particularly for first meetings - determine first whether they are worth the expense; * If you do have to meet someone face to face, use your airmiles to buy tickets; * Use VOIP for long-distance calls - quality is usually great and the cost next to nothing; * Set yourself the goal of lowering your fixed cost level by 25% * Ask for discounts more frequently; * Do barter deals * Take your payroll and check if everyone on there is really being productive; * Freeze internal projects On Incoming Cash: * Go after your receivables and stay on top of it - call them every day if necessary; * Invoice at more regular intervals * Raise money through friends and family in a creative way, with the option to pay them back * Lower your stock - work on a sharper delivery timeframe * Come up with new services ensuring your employees are productive all the time. It is important to get everyone in your company involved. Ask employees to come up with things that can save money - after all they benefit from the company being there in the longer run. Building companies is team work - surviving an economic recession is most definitely down to team work. I would welcome you all to share your thoughts and ideas regarding how to monitor your cash even tighter. Please also see and join in with our Forum Discussion on this topic under the theme "Funding".

5 Comments

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• Rijk Rietveld | Oct 9, 2008 04:20 PM

  Interesting, and a huge dilemma. To survive an economic downturn, you need to kill the economy (by stopping to spend money). I guess it all comes down to eat, or been eaten.....
  
  I just came back to NY from Europe, and used my normal car service. All big accounts are scrapped for these guys and he was waiting for five hours at the airport until he could get me to Manhattan. Even a bigger-than-normal tip cannot make up for that.
  
  With everybody cutting down on services and conveniences, the economy suffers over a very broad spectrum.
  
  

• Howard Greenstein | Oct 11, 2008 10:19 PM

  As a small business person, I can verify that the large companies I deal with are waiting as long as possible to fulfill invoices. I'm going to have to go after some of them for a >60 day penalty just to get their attention.
  Clearly, anything you can do to get paid up front or get better terms is important in these days.

• Tyffani Purnell | Oct 13, 2008 01:47 PM

  It is clearly evident that we all must buckle down and stay connected in a crisis such as this. As a small business owner and entrepreneur I really see the need for us all to stay connected. We have gone through our lives day by day in this fast pace, self serve, get in get out way of living and have lost touch with one another and the importance of family. Personal family, spriritual family and business family. You are so right in that we need to create additional services that will generate the cashflow needed and cut down on our expenses as much as possible. Now is the time start serving up some "hot chocolate" because we are in a major blizzard and ice cream just wont do.

• Ryan Jaskiewicz | Oct 21, 2008 10:05 AM

  I agree that many companies are taking much longer to make payments and do not really think about the effect that it has on many small businesses. That said, we are a small finance company that does account receivable financing. This is financing based on the A/R that you have sitting waiting to be paid. Instead of waiting 30-60 days, small businesses can access up to 80% of those funds on day 2 of invoicing instead of 45 days later. This is an expensive option, but an option that creates cash flow in an economy that is frozen solid. Please feel free to contact us with any questions on financing at www.KandLFinance.com.

• Erwin Versleijen | Oct 26, 2008 05:11 PM

  Hi, I wrote a piece for my clients and prospects that is more or less in line with your views. Enjoy reading, Erwin
  
  Downturn Survival
  
  In 2007 the first signs of the economic downturn started with the collapse of some finance houses in New Zealand. That the economy was struggling was obvious, but not that many companies did something about recession planning. Today, the circumstances are even more clear, only the strong and smart will survive in this uncertain business climate. According to the Cambridge online dictionary uncertain means ‘not knowing what to do or what to believe, or not able to decide about something’. A couple of years ago, I introduced a new management term: Management by Wandering Around. I often saw managers drifting, not knowing what to do and not making (the right) decisions. When the economy goes up and the business is healthy and wealthy, nobody really seams to care about this. But when it goes down – and I believe it will even go further – you should care and act. It is not too late to do so, here are a few tips that might help you to get the picture right and make change happen.
  
  Focus on the bottom-line. You are running a business, not a charity, and therefore you should only focus on those things that directly improve profits and shareholder value. Have a look at the formula below:
  
  ↑customers x ↑units x ↑price = revenue - ↓cost of goods sold = margin -↓overhead = profit
  
  When was the last time you reviewed your pricing strategy? In this formula above are 5 items that directly impact your bottom-line, even if you improve one and all the others remain the same. It is no rocket science: a price increase has a direct impact. If your gross margin is currently 30% and you increase your price by 10%, you can afford to loose 1 in 4 customers (25%!). Just imagine what you can do with that extra time that becomes available for your sales force, it opens doors to new customers. If your current EBIT (net profit) is around 15% and with the extra time generated you increase sales revenue by 10%, your net profits will increase by 47%.
  
  Picture what will happen to your short-to-medium term bottom-line when you also start to alter the selling, general and administrative (SG&A) costs; direct and indirect spending and cost of goods sold (COGS)…
  
  What goes out, must come back in. In today’s environment you should keep an even closer eye on your cash flow. Just sit down and write down all the amounts that go out and should come in, and especially when. This gives you a pretty good overview how your financial position will be in the next 6 to 12 months. Key here is that you are absolutely honest to yourself and the business. Do not make wrong assumptions. If a deal should come in next month, but you are not 100% sure, write it down for the next month. The same with invoicing, if something is sold in the middle of the month, it is most likely that the cash will come in the next month or even later.
  
  Equally important is that you invoice your customer straight after the delivery and do not wait till the end of the month or even longer. Your customer might not be there anymore… Have a look at the number of transactions you do with the same customer, and see if the time between invoicing and getting paid (days sales outstanding) is increasing. This could be an indicator that your customer is in rough water. Small businesses in New Zealand tend to settle their accounts on average in 49 days, the medium and bigger sized companies just over 43 days. This has a direct impact on your cash flow and interest. Do you perform credit checks on your customers?
  
  Plans are nothing, what counts is planning. The words of Dwight ‘Ike’ Eisenhower, former US President and the man who was responsible for planning and supervising the successful invasion in Normandy during Word War II in his role as Supreme Commander of the Allied Forces.
  
  When was the last time you had a look at your plans and how far adrift are you? Revisiting your plans once a month or every quarter is essential for good business planning. Does your sales forecast echo in the cash flow for example, or is it a stand-alone instrument? Now is a good moment to review forecasts, current projects and your business strategy. You need to ask yourself how vulnerable your business is and consider different scenario’s for the road ahead. Sales management for instance is all about planning, setting targets and using tactics.
  
  I often see during downturns that sales staff is made redundant and marketing costs are being slashed. But cost cutting in these areas is not always the solution. Making staff redundant has a direct negative impact on the spirits of the company, its customers and overall performance. Motivation and training are instruments that help. Cutting your marketing budget is also not the cure, in times like these getting your message out there is key. Just imagine if you keep communicating with your prospects and your competition does not, will you not have an advantage over them?
  
  Every cloud has a silver lining. An idiom meaning that you should never feel hopeless because difficult times ahead always lead to better days. The environment today also opens up new opportunities, ventures and ideas. Have a closer look at your product service groups and customer market groups and see how and where you can be innovative and different.
  
  You do not need eyes to see, you need vision
  

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