• Michael Hudson

Preserving Cash During an Economic Shock

Recessions are not new, and neither are best practices for surviving through them. However, the ferocity and speed by which the Coronavirus crisis arrived took our breath away. Sadly, many companies won't survive until the recovery starts but we've got a checklist for you borne out of hard experience you can follow to reduce the risks of your company becoming one of them. Following the checklists may help you work your way through this crisis and emerge out the other side fitter and wiser as a business.

As we get distracted with the day to day fire drills and challenges of growing a business, a lot of "expense creep" starts to worm its way into your cash burn and because it tends to be gradual you don't even notice it at first. But all those expenses add up to a significant dent in your cash flow and many will be non-essential when you are in cash flow preservation mode.

Your approach to cash preservation should be clinical and include a willingness to make hard decisions including those around staff as a failed business means everyone loses. Here's are some things in your possible expenses list for closer scrutiny and possible elimination. They are presented in the priority order with the least harsh and low hanging fruit measures coming first.

RULE #1 - Know Where You Stand

You may have to take some extreme measures to protect your business so don't be naive about your key business metrics. The first step should be a thorough review of the business and be strong enough to play the devil's advocate. Favor leaning towards the worst-case scenario rather than the best. If you can manage to the WCS then you may have some more maneuvering room later on. Things you must do:

  • Do a blunt evaluation of your sales pipeline, challenge your salespeople on the validity of every single opportunity and ruthlessly weed out any opportunity they cannot provide a convincing defense of its probability to close and tasks/timeline to get it closed. Rose tinted glasses don't pay bills. See our other article on Selling in a Downturn

  • If you aren't convinced by your sales team's rationale for the more important deals, call the clients yourself and ask them for a candid opinion on whether or not the deal will get done. You may not like what you hear but at least it won't sneak up on you when you can least afford it to

  • Do a candid assessment of your sales and marketing activities, understand whether each type of activity is producing a return-on-investment and discontinue any that aren't paying their way (trade shows, channels, pay-per-click, tele-prospecting vendors, Named Account Lists strategies and others)

  • Do an as-is cash flow forecast based on your current revenue, expenses and forecast revenue. Then consider the cost saving measures below and model the outcome into your to-be cash flow forecast

  • Keep modeling in the cuts by severity until your cashflow forecast gets to break-even or mildly positive. Only cut what you have to and no more

  • Aggressively pursue and clean up your overdue account's receivables. If some customers cannot or won't pay, you need to know that NOW and model that delay or default into your cash flow models. Lousy A/R management kills more companies cash flow than anything else

  • Everything needs to be on the table for scrutiny, everything. Bias, romantic notions, rose tinted glasses and blind optimism doesn't pay the bills or tell you what you really need to know.

The Nice to Have List.

These are the things that can be immediately cut without causing undue hardship. Examples are:

  • Catered meals & snacks

  • Pot plant maintenance

  • Free gym memberships

  • Incentive programs

  • Coffee & water service. If you have a water cooler subscription, replace it with a faucet attached water cooler machine

Subscription List

This is often a major expense drain due to lack of management of your subscription services such as:

  • Unused Salesforce or other CRM licenses

  • Unused or lightly used software tool licenses

  • Unused or lightly used sales & marketing tools and services

  • Payroll, HR, 401K and Benefit management services

  • Go through every user license-based service or product and make sure departed staff have been removed from the billing lists for these services

  • Cancel everything that isn't absolutely essential to the running of the business

  • Research lower cost alternatives to existing tools and services. You may have good negotiating leverage as those vendors are also looking to preserve business

Financial Engineering List.

These are things you can do to related to company finances:

  • Government support programs - apply for programs like PPP to protect your workers for as long as possible

  • Do you have higher interest business loans or corporate credit cards you can replace or refinance with lower interest alternatives while your finances are still in good enough shape to qualify?

  • Speak to your banks and lenders to extend loans where you have paid a lot of principal already to extend the loan term to reduce the monthly payments. Ask credit card vendors for reductions in CC interest rates or merchant fees

  • If your product or service has high enough profit margins, consider factoring or invoice financing to improve cash flow. These services tend to be high interest but will advance you up to 80% of the invoice value up front and that could make all the difference

  • Replace expensive travel and lodging with online meeting and conferencing services where possible. If you still have people traveling for work use lower cost hotel chains and manage T&L expenses tightly

  • Are you leasing too much office space? Can you move to a smaller, cheaper space or can more staff work from home to reduce your net office space usage?

  • Is your HVAC running 24 hours a day? Can you reduce your utilities usage and cost?

  • Are you doing matching 401K contributions? Consider temporary suspension of the matching until the cash flow/revenue danger has passed.

  • Are you big enough to shop around for a cheaper corporate health plan without compromising on the existing plans options?

  • Consider reallocating cash from non-essential activities to increased business development. An improved revenue stream and good A/R recovery may go a long way to keeping your finances in balance through the downturn

Workforce Related Changes.

This is the harshest and saddest category of all but cannot be ignored if the survival of the business is truly at stake. Considerations are:

  • Salary cuts. If you do this, lead from the front and cut your own salary by the same or more than you expect from your staff. Communicate honestly and candidly with your team before you do this. Staff may be more willing to go along with this if they know it's a way of preserving the jobs of most or all of the team. Only cut as far as it takes to preserve or get to break-even cash flow

  • Terminate non-performing salespeople - A salesperson who is bringing in less revenue/profit than their cost of employment isn't adding any value to the business and is just a hole in your P&L. Remember, cost-of-employment is salary+benefits+taxes+facilities

  • Consider terminating all non-essential staff such as receptionists, cleaners, junior or more inexperienced staff whose departure will have the smallest effect on the business

  • Scrutinize your staff roles and utilization. Do you have 3 people in the same role working at 30% utilization that you could reduce to 2 people at 45% utilization of 1 person at 60% utilization

  • Consider moving same staff to part-time work. This may be an option if they are from a 2-income family and can absorb the impact for a while. This allows you to maintain the relationship with the staff member and keep access to their expertise and knowledge while reducing payroll cost

Some Parting Advice

This is the hardest part of running a business when things aren't going well in the economy but rose-tinted glasses are not your friend here and won't ensure the survival of your business. Hard-headed pragmatism and hard decisions will. But here's some other things to consider:

  • Communicate often and honestly with your teams. It's human nature to fill an information vacuum with fear, doubt and supposition.

  • Be empathic and understanding, even if the responses and questions are challenging or downright hostile. Self-righteous defensiveness will make things worse and people that can still jump to another job will.

  • Don't keep the harshest cost-control measures in place more than a day longer than you have to once the danger has passed. When the job market improves, people will vote with their feet.

  • Use this experience as a learning experience in terms of more disciplined cost control going forward on the less harsh measures

  • Consider creating a cash reserve to give your business a buffer for the lean times. We are always amazed at the number companies that don't do this

  • Stay focused, calm and mentally healthy yourself. Your team is expecting their Captain to calmly steer them through rough waters and not panic or melt-down

Good luck to you all and we will see you on the other side soon!


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