Managing a Cash Crisis

In a cash crisis, the first task facing you or your turnaround business consultant in the business rescue is ensuring the business’s short-term survival. This will depend on taking emergency measures to conserve and generate cash to buy time for longer-term issues to be addressed.

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Unfortunately you may need to take action before making a full assessment of your business’s problems or deciding on your recovery strategy. There is therefore always a risk that the short-term actions you take will be detrimental to your business’s long-term interests. While surviving the short term must take priority at this stage in order to have a long-term future to worry about, where possible you should try to consider the long-term consequences and adopt an approach that balances:

short-term survival; and

long-term regeneration.

But when in doubt, short-term survival must come first. A cash crisis can arise for a number of reasons ranging from operating losses or excessive levels of debt draining the cash away; to excessive capital expenditure or inefficient trading operations absorbing too much cash into illiquid assets; through even to a rate of growth that is too fast for your supply of cash to keep up. The key areas to focus on to survive a cash crisis are to:

Control the cash the business has: centralise and tighten cash management throughout the business;

Do more with less: squeeze the working capital cycle;

What you don’t spend, you get to keep: stop the leaks and reduce outflows;

Get more cash in: Free up cash elsewhere, improve profit generation, raise new funding.

Prioritisation This gives a wide range of possible actions so prioritise these based on which will have the largest and fastest relative effects so that you can focus on the ones that will make a real difference. The good news is that if you can demonstrate that you can identify, face up to, and deal with, a severe cash crisis by taking the actions necessary to survive, you will be increasing your credibility with your lenders and therefore their willingness to support you through the process.

Step 1: Control the cash you have

It is surprising how many businesses in a cash crisis fail to take the basic steps to control this scarcest of resources and to ensure it is used as efficiently as possible. As has already been discussed, you will need to prepare a cash flow forecast. From this exercise it will logically follow that to efficiently manage the business’s cash you need to:

Centralise control of cash receipts, payments and forecasting (and forecast daily on a cleared funds at bank basis). You can then prioritise and schedule payments so the available cash is best used for the benefit of the whole business, rather than being used say, by individual mangers, sites or branches as they see fit.

Roll forward the cash flow forecast on a regular basis, reviewing performance against forecast each time you do so to pick up any variances that need to be investigated or which can be used to improve the next forecast’s accuracy.

Increase the level of authority required for ordering goods or making payments. Company credit or charge cards should usually be cancelled or restricted so that cash is not wasted or committed outside the central forecasting regime.

In using your cash flow forecast you may be able to identify where the cash is leaking out. Is it particular branches, sites or parts of the business? If so, you can target these areas for specific reviews and remedial action.

Step 2 Do more with less

Your working capital cycle should be a virtuous circle with stock turning into sales and debtors and then into cash to provide funds with which to pay your suppliers and contribute to covering your overheads and generating a profit:

Whether this cycle requires funding is determined by your actual terms of trade with suppliers and the degree to which you are holding cash tied up in firstly stock and then debtors.

If on average you have say six weeks worth of stock in various forms, raw materials, work in progress and finished goods, and on average your debtors are taking say 60 days to pay the from the moment you but some product to the moment you see the cash in from its eventual sale is some 102 days.

So if you need to pay your supplier say 45 days after they deliver then you have a 57 day funding hole that needs to be covered between paying for the goods and seeing the benefit of the relevant receipt.

And obviously the higher the volume of trading you are undertaking, the larger the value of this gap which is why high growth businesses can fail through running out of cash, a problem known as overtrading.

So, if you can reduce the average periods of stock holdings or the days debtors are outstanding (or increase time taken to pay creditors); then you will either free up cash for use within the business, or reduce the cash needed with which to support the level of trading.

Whichever way you want to look at it, they both amount to good news. There are many techniques derived from lean manufacturing techniques which a business can use to develop a ‘Lean Cashflow’ in respect of stockholdings such as:

using theory of constraints planning, kanbans and cellular manufacturing systems to substantially reduce the supply cycle time and hence stockholdings;

only buying in goods when it has a firm order and can ship it straight out (a back to back deal); or

taking in all its goods on a consignment stock basis, where while it physically holds the items on site, it only buys them from the supplier when they are used..

You are likely to have a lot of money tied up in debtors. As trading and sales becomes more difficult, many businesses feel less confident in demanding payment from customers for fear of losing future business, or are distracted from the day-to-day necessity of chasing in debts and by default allow debtors to enjoy longer or more extensive credit terms than normal. This ties up vital working capital and is often one of the first place to look for funds. You should review your debtors ledger and take action to:

reduce credit terms to customers

target and get in overdue debts.

If as a result you find that your credit control procedure or practices are poor, mark this as an area for specific action as part of your turnaround plan. In the meantime, introduce tougher credit terms for customers. Managing a cash crisis so as to achieve a business rescue involves tackling four areas, the last two of which are reducing the amount of cash going out and getting more cash coming in by way of everything from asset sales, to new investment and in the longer term to achieving sustained increased profitability which to me is the real turnaround definition.

Step 3 Reduce the Amount of Cash Going Out

Just as with everything else in life, what you don’t spend, you get to keep, so look at:

Cancelling voluntary outflows back to shareholders such as dividend payments.

Cutting back or cancelling:

Advertising and marketing (but only after assessing how immediate the link is between this and sales and do not cut advertising that is vital for short-term turnover).

Training; but keep any required to meet statutory requirements.

Research and development; but assess the risk that you may run of losing any key projects or staff that are vital to the long-term recovery plan.

Capital expenditure; but assess how vital any such planned expenditure is to improving profitability in the short-term or the long-term turnaround plan.
- Increasing creditor payment periods by agreement with suppliers.
- Negotiating scheduled payments with key creditors, HM Revenue & Customs (an informal arrangement). If agreeing scheduled payments with suppliers, be clear as to what proportion of the payments made is going to be used by the supplier to reduce the total amount you owe and what proportion will be used to allow further supplies on credit.
- Consider using an insolvency act procedure such as a Company Voluntary Arrangement (CVA) or administration to obtain protection or agree a formal binding deal with creditors.
- Consider whether any key creditors might be willing to convert their debt to shares in the business (a debt for equity swap) if this is acceptable to the existing shareholders.

Step 4 Get More Cash Coming In (Or Credit From Elsewhere)

Other than trading, possible other sources of cash are from:

selling assets;

improving profit generation; or

raising new borrowings or obtaining investment.

Selling assets: Review the assets on your balance sheet to identify:

Surplus fixed assets (land and buildings, plant and machinery, motor vehicles) that can be sold.

Assets that could potentially be made surplus (and then sold), for example by subcontracting out your manufacturing processes.

Essential fixed assets that you need to continue to use, but which can be sold and leased back to provide cash.

Underutilised plant and machinery capacity that can be hired out, or spare factory or office space that could be sub-let.

Separable and saleable investments, subsidiaries or any parts of the business (such as a specific branch) that could be disposed of for cash

Is there any equipment lying around that is not even on the balance sheet that can be sold?

Improving profitability: fundamentally, to improve profits requires achieving some combination of the following, depending on which area is most responsible for the problem:

increasing turnover; by increasing some or all customer numbers, value of spend per customer or frequency of spend

increasing margins; by reducing costs of sales; and/or

reducing overheads; which includes dealing with any non-performing parts of the business that are dragging the rest down.

In the situation of a cash crisis, the steps that have the highest short-term return tend to be focused on cost reduction (although often simply raising prices is a surprisingly easy early win). In the longer term the focus shifts to re-positioning the business so that it moves into the most profitable areas open to it. Raising new borrowings or obtaining investment: there are a number of sources of funding that can be looked at but please do bear in mind the ‘Wealth Warning’ given in the first of these articles:

Use your cash flow forecast to seek an extension of your existing bank facilities or other borrowings to cover the forecast requirement. If appropriate, seek to agree deferment of loan repayments or to roll up interest for later payment. Do you have any unpledged assets that can provide security for new loans, such as brands, trademarks, and other intellectual property rights?

Asset based lenders who specialise in lending against a specific type of security (such as factors who lend against your debtor book) will often advance a higher loan to value against these assets or security than may be available from normal banking arrangements. Can you use such sources to obtain more borrowings against your assets than you currently have available from your bank?

Consider your trading partners, agree new stocking arrangements with supportive creditors such as sale or return; pay when paid; or agreed longer payment terms; ask customers to supply free issue stock for you to work on so that you do not have to buy in materials.

Seek injections of capital from existing shareholders or directors (your bank may well put pressure on for this to happen in any event as a sign of commitment to the turnaround , as well as a way of managing or reducing its exposure).