Managing a Cash Crisis

Cash Crisis Survival WorkpackTo help business owners deal with surviving a cash crisis, Galen have produced the Cash Crisis Survival Workpack CLICK HERE for full details.

In a cash crisis, your business’s short-term survival depends on taking emergency measures to conserve and generate cash to buy time for longer-term issues to be addressed.

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.

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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.
Surviving a cash flow crisis

The key areas to focus on to survive a cash crisis are to:

  1. Control the cash you have
  2. Get more cash in from normal trading
  3. Get in more cash or credit from elsewhere
  4. Reduce and/or control the cash going out
  5. Reduce the amount of cash you need to trade
  6. Improve profits

One way to prioritise actions is to use a matrix like the one below to plot your estimates of which actions will have the largest/fastest relative effects so that you can focus on the ones that will make a real difference.

High
Impact Medium
Low
High Low
Ease/speed

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.

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 discussed, you will need to prepare a cashflow 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 cashflow 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 cashflow 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.

Get More Cash In From Normal Trading

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 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.

Get In More Cash Or Credit From Elsewhere

Other than trading, possible other sources of cash are from selling assets, raising new borrowings or obtaining investment:

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?

Using your cashflow forecast, seek to negotiate 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?

If seeking to borrow further funds, always consider carefully your business’s ability to meet the payments in both the short and long-term before taking further money. You do not want to simply dig yourself deeper into debt that you cannot afford to service, particularly if you may be asked to give personal guarantees.

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) and/or seek new investors.

Click here for information on finding turnaround equity investors.

If you are being asked to make a further investment into a business in difficulty or to personally guarantee further borrowings for a company, it goes without saying that you must look very carefully at the commitment you are making, the likelihood of recovery and the impact it will have on you should the business fail. You should always consider getting professional advice in these circumstances.

Reduce And/Or Control The Cash Going Out

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

Cancelling discretionary expenditure such as payments of dividends.

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, Inland Revenue and HM Customs & Excise (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.

Pensions Warning

In the aftermath of the Maxwell affair, the regulations to protect employees’ pensions have become more stringent, with strict duties and timescales in respect of the payment across of pension contributions.

The different type of possible pension schemes makes this a complex area, but the general rules must be:

  • always pay over employee contributions deducted from salaries
  • always obtain professional advice on any proposal to reduce employer contributions before making any change.

Reduce The Amount Of Cash You Need To Trade

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 as if:

  • you have 30 days from receipt of goods within which to pay your supplier, but
  • goods sit in your stock for two months on average before being sold; and
  • it takes you an average of a month to collect the cash from your customer; then
  • you have a funding gap of two months between the period of credit you are receiving and the point when you are realising cash which then tends to mean relying on an overdraft or other lending.

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. Reducing the length of the funding gap means that what cash you do have can fund more trading.

So for example, a company could reduce its investment in stock and debtors if it:

  • only bought in goods when it had a firm order and could ship it straight out (a back to back deal), then the debtor would pay at exactly the same time as the creditor was due; or
  • only stocked what it could sell in a month for cash; or
  • took all its goods on a consignment stock basis where while it physically held the items on site, but only buying them from the supplier when a customer took one.

It could also seek to replace bank lending with supplier credit by taking three months credit which would match the date of receipt and payment.

Or it could seek a mixture by for example, taking two months credit from suppliers and only stock items which sold within a month.

You should look at all aspects of your working capital to see where there is scope for reduction by:

  • Reducing finished goods stock (such as by a sale of slow moving or old items), but be careful with such strategies and consider the risks and consequences (for example, is dumping stock in your normal markets going to spoil your efforts to increase normal sales?)
  • Complete your work in progress and turn it into sellable finished goods as soon as possible.
  • Review your production management. (Particularly if you are building say batches of subassemblies, does this mean that you are deliberately tying up cash in parts that will not become finished goods for a long time? Can you move to just in time production?)
  • Cancel or reduce any outstanding raw material orders so long as this does not give you a contractual problem or unacceptable risks of stock outs.
  • Return any unnecessary stockholdings to suppliers either by agreement or by stepping up your quality control standards and checks.

Improve Profits

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

  1. increasing turnover; by increasing some or all customer numbers, value of spend per customer or frequency of spend
  2. increasing margins; by reducing costs of sales; and/or
  3. 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.

Increase turnover: Can you raise prices? But check how sensitive your sales volume will be to price first. If you produce a commodity (such as pencils), customers will tend to buy largely on price and so raising prices above market rates will lead to a major loss of sales. If your product or service is differentiated so that customers cannot buy exactly the same thing elsewhere, the position is a more complex question of perceived value, and you must judge how much can you increase your price before customers decide that a cheaper product will do well enough for what they want.

What opportunities can you identify to achieve quick, cost effective, and relatively certain increase volumes by attracting more customers, getting them to come back more often, or to increase their spending with you on each occasion?

Increasing margins: Identify the key constraints on the business such as a production bottleneck and ensure that profit is maximised by focusing on the most profitable use for the capacity available at that constraint.

Improve your productivity and output by looking at your processes, but solutions requiring capital expenditure (such as increased automation) tend to be long-term issues.

Improve your efficiency in control of purchasing, distribution, contract control, quality assurance, or waste management. Look for any opportunities to reduce the cost of goods sold such as reducing raw material prices, reduce scrap, change materials or lower labour components.

Reduce wage costs by introducing short-time working or a redundancy programme (compare your head count to competitors or to that of two or three years ago) but be careful to ensure that this is understood to be a short-term step, and do not preclude the need to make further long-term changes.

When making redundancies you will need to take care to meet current standards and legislation in respect of:

  • consultation with employees
  • grounds for redundancy
  • selection of employees.

It is best therefore to obtain up to date advice from your solicitor. You will also need to fund any redundancy payments required. In some circumstances the Insovency Service’s redundancy fund will be able to make a loan available over up to three years with which to help fund the payments and you should contact the Redundancy Fund (helpline number 0845 145 0004) to find out what assistance is currently available.

Reduce overheads: Can you reduce manufacturing overheads?

Are your selling, general and administrative expenses in line with industry standards or can you look for savings in some of the following areas:

  • Management salaries – should you share the pain?
  • Premises costs – can you consolidate and lease out extra space?
  • Vehicles – can you eliminate the car fleet, or have your employees bear the costs of cars?
  • Professional costs – can you reduce the costs of accountants, lawyers, etc?
  • Postage – do you really need overnight couriers, etc?
  • Telephone costs.
  • Advertising and promotion costs – is your advertising cost effective? Is it an investment in the future or a necessary expense for obtaining sales in the short term?
  • Selling expenses – can you cut the size of the sales force, or the number of sales offices without significant short-term costs?

Consider closing or selling any of your business, subsidiaries or branches which have net cash outflows or are unprofitable.

Click here for information on key points and FAQs.

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