5 Steps to Better Cash Management
As a turnaround professional, I help companies that have fallen behind in their financial obligations to creditors, employees, and other stakeholders. The cash problems a company experiences usually start small but can grow over time to become almost unmanageable. For instance, a company may show the first symptoms of financial distress by stretching payables with a handful of creditors. These problems may grow to affect a greater number of creditors and in larger dollar amounts, which put the company in a deeper hole. The problems can eventually become so great that they reduce the number of options available to a company and jeopardize its very survival, but most of these start in one place: cash management.
Many of the problems these companies face can be avoided with more effective cash management discipline. Below are five steps business owners should use to survive a cash crunch. The earlier a company can adopt these, the better chance it has of successfully weathering the storm. In other words, these steps help ensure a cash crunch does not become a cash crisis.
1. Control and manage cash:
Cash management can mean a lot of things, but the following three elements are key: First, ensure there is discipline around the number and types of ways cash can be spent by the business. Company leaders should limit the number of signatories on its accounts, reduce the number of employees with company credit cards, and be sure oversight exists for processing trade payables. In theory, they should channel all the company’s spending to a few trusted individuals. Nothing should go out the door that the CEO or CFO is not aware of.
Second, it’s essential a company forecast its cash position weekly, including cash receipts and disbursements. All too often, a prospective client in a cash crisis explains that the sudden crunch was unexpected. A cash crisis is always unexpected when the company does not forecast cash! If the company had forecasted cash, it would have had weeks to prepare and mitigate the crisis.
Last, find hidden sources of cash. These might be stale legal retainers that have never been refunded, dormant cash accounts, unclaimed property, collection of tax credits, and so forth. Every business has hidden cash in some form, and it’s usually large enough to fund an entire payroll or two.
2. Find expense savings:
Companies usually have no problem ramping up cost structures during good times, but it’s rarely as easy to squeeze costs out of the business during bad times. Most businesses in a state of decline assume a slump in sales is temporary and that it just needs to weather the storm. While this can be true in some cases, it’s important to recognize when cost cuts are necessary, and how to effectively make them. Business owners must be quick to respond when expense cuts are necessary. Any delay in making expense cuts will cause a cash crunch. When expense savings includes downsizing staff, it’s important the company seek qualified help to comply with local and federal employment laws.
3. Collect from customers:
Cash is king during a cash crisis. Business leaders should accelerate efforts to collect cash, invoice customers as quickly as possible, offer more generous discounts for more timely payments and shorten payment terms altogether, and aggressively collect from past due customers. Management should hire legal help to perfect security interests and/or file bond claims. For businesses where customer relationships are long-standing, owners or other leaders with strong relationships should get involved with collection activities.
4. Negotiate with trade creditors:
Keeping communication channels open with vendors is critical. Start early to let vendors know you will be paying them later than normal terms. It is critical to keep their trust to keep valuable products and services flowing. When things get really tight, it will be easier to negotiate with them if you have communicated along the way. Negotiating with creditors can be a delicate effort, and companies should retain qualified legal counsel to help. With the right help, companies can usually find significant short-term cash savings by restructuring trade payables, lengthening payment terms, receiving forgiveness of debt, and/or trading debt for equity.
5. Sell non-performing assets:
Just like households, companies accumulate a tremendous amount of stuff over their lifecycles. It’s important for company leaders to take action with slow-moving inventory, non-productive capital assets, and dormant real estate. Companies should also evaluate non-performing divisions, locations, and product lines. The sale of non-performing assets can be a significant source of capital.
Cash is the lifeblood of any business. Cash management is what keeps the blood flowing through the business. The five steps above are proven tools used by successful companies to manage, preserve, and collect cash. It’s never too late to implement the steps, and the earlier a company can adopt these practices, the more likely it is to survive a cash crunch.
About the author:
Matt McKinlay is a partner at Advanced CFO, with 19 years of experience working with a wide array of companies in multiple industries as a senior leader. He has been CFO, CRO, or Receiver of numerous companies Matt is credentialed as a Certified Management Accountant (CMA) and a Certified Turnaround Professional (CTP).