In the last post, I talked about managing limited working capital. In this post, I am going to address business owners who struggle to make it through a difficult cash crunch. As a corporate controller for several troubled companies and as a small business owner for the past 30 years, I’ve worked with a few companies that “went off the cliff” into bankruptcy, and I’ve used those experiences to help companies manage their way back to a healthy financial status.
Before we start with some strategies to make it through a cash crunch, we need to do a “reality check”. We need to make a strategic evaluation of our market, our ability to compete for market share, and our probability of making it through our cash crunch.
If we are just postponing an inevitable business failure, we will be extending our own suffering and passing on our suffering to suppliers that we might take down with us. I know this from my own painful experiences in the oil business. I once had a vendor call and plead with me to pay what was due them so that they could make their next payroll. I scraped up what they needed, but do not create this pain for yourself and others on a desperate hope that things will get better. (In a later post I’ll give a real world example of a business viability assessment.)
Now that I have gotten that out of the way, let’s talk about some strategies and how to minimize the pain and suffering of making it though this cash crunch. I learned these strategies from a really smart oil promoter who, unfortunately, was better at promoting investors than at finding oil. I successfully applied them at a much larger company in a turnaround situation.
I am going to assume that you are significantly past due and getting repeated vendor calls inquiring when you will pay them. The following tasks are critical to your success. On a daily basis you have reliable, up to date, information about:
- Your cash balance
- Who you owe money to, how much, and when it is due
- The amounts and projected timing of cash receipts
- Suppliers whose continued service is critical to your continued operations
- Who might be on the verge of taking a legal action that could “sink your boat”
You are now in fire-fighting mode and it is critical that you do not ignore or duck vendors. They do not want to take legal action, which can be expensive. They also know that a legal filing could set off a “run on the bank” by other vendors scrambling to minimize their losses in a bankruptcy. If you represent a significant source of business they will want to protect the relationship.
There are two situations you will need to address quickly; a critical vendor is going to cut you off or a vendor is threatening legal action. I recommend that you dedicate someone to take vendor calls, keep notes of conversations by vendor for a daily status review, and flag by color code their “threat assessment”. High-threat assessments should be brought to your attention at least in a daily review. You will, most likely, be allocating limited cash “on the fly” while trying to have a reserve to put out the next fire.
The Vendor Payment Committee
You absolutely must know which vendors can shut you down by withholding services. Nobody better understands who this is today, and in the future, than your operations people. Establish a payment committee of managers in charge of field operations. With this, the vendors that absolutely need to be paid will get paid first and morale will greatly improve because of managers’ participation in the payment selection process.
One of my oil promoter “mentors” gave me this advice about banking relations: “If you are deep enough in their pockets, they can’t afford to let you fail”. This assessment was correct, at least in my mentor’s situation — we were into the bank for $10 million, and they were willing to loan another $1 million to get us through a crisis rather than write off the $10 million loan. However, this only occurred because vendors had not begun filing legal actions.
In my next article, I’m going to talk about the “reality check” in greater detail and give a real world example for you to think about in your own situation.