• Jackson Payne

Sailing the Rough Seas of A Cash Crunch and Staying Afloat

Updated: Jun 11, 2020

As small business owners struggle to stay afloat amid the COVID-19 health crisis, many are swimming upstream in a sea of uncertainty.

These waters are unchartered territory, forcing them to sink or swim amongst the economic impact of social distancing. Whether a service provider, retail store, or ecommerce business, most companies are in the same boat, and will experience some degree of impact.

Changing the rudder to “survival mode” will help your business traverse these waves of uncertainty, however. For now, your primary focus will be on generating and managing cash. To this end, below are seven crisis-management strategies that can help your business tread these uncertain waters carefully.

1. Create a cash flow forecast.

In a time of crisis, it is paramount that you see your company’s complete financial picture in vivid detail. You might need to make some difficult decisions in the coming weeks and months. Knowing your financial trajectory will better inform your decision making. In times of business as usual, running this forecast monthly is adequate; but, in times of crisis, you need to update this weekly.

2. Curtail unnecessary spending.

Do you have a company budget? Do you review your profit and loss statement monthly? If so, this will give you an advantage in knowing what you spend each month. If not, work with your finance team to get one established. In doing so, you can identify hidden costs, and implement an action plan with cost-reduction measures. To give you a fair warning, this will not be an easy thing to do, but it is necessary if you want your business to survive.

Get lean! Examine every aspect of your company processes to see if they can be improved upon. The need for cash, in conjunction with the lack of it, combined with a decrease in sales is tantamount to the ship sailing in the wrong direction.

While the cash issues of ebb and flow move to the forefront, it highlights the fact that preventative measures should have been taken prior to this crisis. Now that you are at this point, however, we will not belabor the issue. Let's plug up the leak in ship.

3. Hire a Professional

On the outset, it might seem like a ship-sinking strategy to spend money to save money. To the contrary, the help of an experienced, finance professional can be a lifebuoy for your business. They can make a difference between a ship that weathers the storm and one that sinks. To this end, the services of an impartial Fractional CFO are warranted.

A Fractional CFO can give you new and fresh financial strategies to navigate this crisis using proven cash-management techniques. Your FCFO is your partner in helping you reach your fiscal goals in a cost-effective manner. If additional investment is needed, the FCFO can review the ROI of these opportunities with you, and make sure that payback is in the near term.

4. Optimize your working capital.

Look for every opportunity to increase cash. Where are your liquid assets and how fast are you able to collect accounts receivable (AR)? If you have outstanding ARs, invoices or other unpaid customer debt, you may want to offer incentives such as early-pay discounts to get paid faster. In crisis mode, cash is more important than a profit margin.

Optimize inventory turns to conserve cash flow, while being mindful of potential supply-chain disruptions. Confirm lead times and ensure you have your backlog inventory requirements secured.

5. Be candid with your lenders.

If you are indebted to vendors, communicate with them to see if you can negotiate longer or more flexible terms, or pay in installments. Creditors understand the de facto financial situation right now, and some have even reached out first to extend an olive branch. Choose the path of candor and transparency to work through these challenges with your creditors so you will be stronger when the crisis comes to a welcomed end.

Lastly, proactively engage with your lenders by sharing your action plan and business forecast with them. They will work with you, so allow them to be a part of the solution. Show them you are ahead of the curve and managing your credit capacity diligently.

6. Secure financing.

If you don’t have a line of credit, apply for one. As interest rates begin to lower, this might be a good time for you to seek one out. Start evaluating financing options now, even if your cash crunch has not yet hit.

Call your banker and start the conversation. With financing options opening up as a result of a COVID-19 response, you may be eligible for small business loans from the federal government. Research these options and be ready to apply.

Consider financing your invoices, known as “factoring.” You may not have to use it, but in an emergency, you need access to a positive cash flow at all times. Think about other financing options and the possibility of raising capital outside traditional lending institutions. For companies that have been more severely impacted, you can also apply for the SBA’s Economic Injury Disaster Loan.

7. Review your backlog.

Monitor your backlog and make any necessary adjustments to avoid shrinkage resulting from unforeseen cancellations. Remain in regular contact with your customers. Don’t bury your head in the sand to avoid bad news. Get out in front of the situation and make sure you can still deliver and get paid on time.

When the economy is strong, these critical steps are often overlooked in lieu of chasing new business ventures. When the high tide recedes, however, the stumps of missteps show prominently above the water line. They must be corrected quickly to ensure they do not sink your business ship.

Educate yourself in matters of finance and have the courage to act swiftly upon that knowledge. Position your firm for an economic environment for which no textbook exists. In the process, you may even blaze a trail to show other business owners the way.

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