Every business owner knows how important cash and cash flow are in business. At least in theory. With the statistics of small businesses that close after a year, and the small % that are still in business after 5 and 10 years, the intricacies of how it works and what produces free cash flow, may be a little less understood.
A couple of definitions real quick:
Free cash flow is the cash a company produces through its operations, less the cost of expenditures on assets. In other words, free cash flow (FCF) is the cash left over after a company pays for its operating expenses and capital expenditures.
Cash flow – also includes cash derived from loans, credit, investors, etc. These require an additional cost of interest, penalties, return on investment.
Eventually your business needs to produce free cash flow to pay back debts and returns to investors.
Then there is the whole timing thing. One issue that bites many business owners is that their cash-in trails their cash-out. Meaning that our expenses and needs for cash are due before we receive cash from revenues. When this happens, you can’t pay bills or employees. This jeopardizes the survival of many businesses that have a good business model, demand for their product or service, but no ready access to cash to keep the doors open before the revenue comes in.
In my 5-mile radius I watched a bakery owner hand-build his new bakery. It was a painstaking process that took the better part of a year. My taste buds would tingle as I drove by daydreaming about the hot fresh muffins with berries popped, juice flowing down the sides.
The anticipation of opening was palpable. Literally cars slowed as they passed to watch the progress. From day one of opening they had lines out the door waiting for the open sign to turn each morning. It appeared to be a hand-built success.
I think it was less than 2 months and they closed their doors. I was crushed and astounded.
I couldn’t stop thinking about how this seemingly successful business would close. The only conclusion; they ran out of money. I imagine they put every bit of savings in to build the building and only had enough to have to contract and build it themselves. So when they opened, they were counting on the daily cash flow to pay for everything.
Would they have succeeded if they just would have had enough cash to provide working capital for 3-4 months? Did they run out of cash to pay employees and everyone walked out? Did they over buy to start and needed a couple of months to get their food cost in line?
I will never know for sure; but all of my business experience says it was a cash flow problem.
Overlay a Worldwide Pandemic and Vast Majority Shutdowns
Now we have a worldwide pandemic that has required many businesses to completely shut down, others to work remotely or online, and few to remain “open” as essential, but with less business.
Since many small businesses remain with low cash reserves, the shutdown of revenues has sent small businesses into a free fall. The government is trying to help by providing cash flow through the SBA in the form of the Payroll Protection Plan and Economic Injury Disaster Loans.
However, since the entire country (well world) is impacted, many small businesses do not have access to funds quick enough or at all as the first round of this aid ran dry in less than 2 weeks. As an additional $300 billion is signed into action today by President Trump, hopefully some of these businesses will get funds in time to stay afloat.
While I recommend using all resources available, I know that to survive, small businesses need to do some things on their own also. Managing cash and cash flow is always important. Now it is imperative to survive.
Before moving to some cash management tips, let’s first discuss what cash, or lack of, does to our mindset.
Mental Impact of Cash Flow Problems on Business Success
One thing that can’t be ignored is the mental impact of minimal cash reserves or cash flow on our mindset. Face it, when your bank account doesn’t have enough in it to make payroll at the end of the week, we go into a scarcity mindset: Don’t spend a penny, cut every cost possible, stop marketing expense and things that could actually bring business in. And in realty, depending on your business type, you may not be able to afford the upfront costs to even take on a good job or to produce inventory to sell.
This leads to poor business growth decision-making, and unfortunately, we run out of expenses to cut before we are soon unable to operate.
This just reinforces the importance of always managing cash and cashflow in your business.
What To Do Now Though?
Since no one in their right mind would have ever predicted a worldwide pandemic, here we are, many not prepared.
I think an obvious first step for most people is how do I create revenue? How can I sell anything? And while I agree that generating revenue is the quickest way to free cash flow, you are also still battling the mindset issue, which is another powerful, invisible, enemy.
Realizing there may not be any good choices, I would still prioritize efforts as follows:
Get A Couple of Months of Cash Reserves – even if you want to try to pay expenses with revenue, having the reserves in place will help you make better decisions; ethical ones, moral ones, and financial ones.
I have never used debt to open or grow my business, but I did put things in place so that I have access to cash, not only my cash reserves, but with credit. I hope I don’t need to use debt at all. But having it gives me peace to keep making the normal decisions I would make in my business.
I am not saying to do all of these. Do them in order of eligibility. The objective is to get a reserve of a couple of month of expenses.
- Apply for the Payroll Protection Program if you are eligible. Even if you have laid off everyone. You can bring them back and get more creative on revenue generating ideas.
- Apply for the Economic Injury Disaster Loan. The interest rate is as low as you will find anywhere and they have decent timelines to pay it back.
- Look at your lines of credit and what is available if needed.
- Apply for a line of credit or loan. Rates are not as good.
- Look at personal savings as a reserve that could be an option if needed.
Again, I am not saying to go get a bunch of debt and spend it like nothing has happened. I am saying that having access to funds will help you to make the best go forward decisions as it provides choices. Having options gives us more confidence.
Manage your cashflow aggressively – the goal is to maintain your cash reserves or open credit as much as possible and to generate free cash flow as soon as possible.
- Aggressively collect any outstanding receivables.
- Change your credit policies to get down payments on big orders or to reduce credit terms to collect your money on a shorter timeline.
- Adjust pricing as needed to stimulate demand. There is no point in losing money on any sale. That just hurts your business more. But lower margins, albeit they hurt your profit margins, cover your fixed expense and are free cash flow.
- Eliminate any non-essential expenses like subscriptions, travel, continuing education, meals and entertainment.
- Negotiate with vendors of fixed expenses like landlords to reduce or delay payments.
- Shutdown short-term if the costs to stay open with only partial services outweighs the cost of shutting down completely.
Develop your re-opening and business back-to-normal plan – getting back to generating cashflow at historic levels is imperative. If you are slow or shutdown, now is the time to plan.
- Brainstorm with key people in your organization. Just saying ideas out loud with others will spur on additional creative thinking. Ideas will morph and combine.
- Stay in your wheelhouse. If we go completely outside of our wheelhouse, it usually costs more to ramp up at first for what may be a short-term venture.
- Implement as soon as possible anything in your wheelhouse that brings in positive gross profits to help cover fixed expenses.
- Execute excellently. Business that provide value, excellent work, and over the top attentive customer service will not only get referrals but they will keep the business long term. This is potentially seeding an even stronger business on the backend of this crisis.
- Create a long-term vision you can share with your team. When our team knows that we are planning for the long term, they stay loyal and contribute as part of the vision because they are not looking for Plan B to ensure their families are okay.
Your business may not be in dire straits, and you may have cash reserves and continued cashflow. Obviously, then I would not go get more credit or debt. But many have been caught unprepared by this dramatic economic impact.
If you are one of the latter, there is hope. We need to do these things to help our businesses survive. But you know that I still believe that God is the only one in control. In addition to these tactics to manage cashflow, keep praying and keep looking to the Lord for guidance and direction. It always trumps what we can do in our own strength. So, keep a strong tie to Jesus, pray for wisdom and discernment, and move forward knowing that the Lord will open and close the doors He wants us to go through.
We are happy to help with plans for your business. Contact us at 225-341-4147 to see if business coaching can help you navigate your specific situation.