Cash flow in times of crises - when stakes are high and certainty is low
Updated: Dec 2, 2020
What should executives do about their cash flow in times of crises, when stakes are high and certainty is low?
In times of crisis, cash flow comes at a premium. Why? Because having sufficient cash is key to your business surviving another day.
This is the reason why in times of crisis cash flow attracts the attention of high-level executives, who would usually leave this problem to the finance department.
During my decade and a half of money management experience and undivided attention to working with executives to strengthen their financial position, I have witnessed businesses really seizing the opportunities created by crises. I have also witnessed those who have seen crises as a real problem and have been fighting for survival and seeing soaring cash generated and profitability.
Which side of the crises are you on? The problem side or the opportunity side?
Let me explain.
The Chinese use two brush strokes to write the word ‘crisis’ – one to represent danger and the other one to represent opportunity.
Problems are caused by change. A crisis is also caused by change, except for the fact that the change caused by crisis is more pronounced, more intense. Because of this, to succeed in crises you need to act faster and better than usual. More assured.
And who is going to survive? Those businesses that have the capability to embrace the change and act fast and smart. Businesses that can see and seize the opportunities created by change. The strongest!
Weaker businesses are likely to be fighting for survival. A crisis causes rapid change and unless executives demonstrate the ability to overcome the problems caused by the crisis, they will most likely lead the company into bankruptcy due to poor cash flow generated and weaker cash flow statement.
It is important to note that as problems are also opportunities and a crisis is a more pronounced problem, hence - any crisis is a more pronounced opportunity to improve your money management, increase your cash flow and profitability.
Now that we have clarified this, it is time for us to address one very important question:
What should executives do in a crisis? What money management challenges are they expected to overcome in crises?
In crises, it is really important to look after your cash flow. Preserving cash for uncertain times is really important. If you already have cash reserves set aside, then keep 3-6 months’ worth of operating expenses and direct labour to see you through the crisis. Outside of the crisis, setting aside 2 months’ worth of operating expenses, direct labour and no line of credit is sufficient to see you through a bad quarter, for example.
Despite cash reserves, it is really important that you check your liquidity position, in some cases daily, and in other cases weekly. In order for you to get an accurate overview of your current liquidity, we suggest that you do 13-week cash flow projections – cash in and cash out. We have discussed this topic in detail in our latest cash flow book “Maximise Your Cash Flow During Crises” which you can get HERE or straight from Amazon.
What else is important? To look after your most valuable assets – your people and your culture. The usual reaction to a crisis is to fire people with the aim of cutting costs. However, that is certainly not the best thing to do, since people are the muscle and the brain of your company. As we advise in our cash flow book “Maximise Your Cash Flow During Crises”, if you have to cut people, cut their hours instead of cutting them out of your business. That way you will preserve your assets and ease the cash burden at the same time.
Firing people is like wanting to lose weight and you chop your arm off in order to shed some weight off, which doesn’t make sense. Instead, it is wiser to put your focus on losing fat. Isn’t it?
Don’t misunderstand me when I say firing people is a mistake. Going through your business and identifying unproductive people is what you should have done anyway to keep your cash flow and cash flow statement healthy. Why keep unproductive people in your team?
And if you have to fire people, make sure you do it in a way that preserves your culture and won’t negatively affect your profitability.
What else is expected of as an executive in such times? Establish what is in your control, and start from there. It is time to look inside yourself and your company and see how you can prevent cash flow and the whole company from falling apart. Remember, you cannot control the external environment, but you can control the internal factors. All your solutions are on the inside of your business.
Sadly, I have been witnessed a lot of companies making major strategic management mistakes right now. They are wasting a lot of time and resources applying for interest-free loans backed up by the Government. The majority of businesses perceive Government loans as free money, but what they don’t realise is this is adding up to their existing debt, putting even more strain on their business finance and cash flow. A loan is not your money, so you will have to re-pay this sooner or later. What if you are unable to cover your debt in the future? What if this puts such a big strain on your business that your ability to grow or even survive will diminish significantly? Only look for getting a loan after you have exhausted all other options. In “Maximise Your Cash Flow During Crises” we give you other more reasonable cash flow solutions to take your business through a crisis and even boost your profitability.
We encourage businesses to implement the cash flow system we have presented in the “Maximise Your Cash Flow During Crises” book, so they can build financially strong businesses and cash flow statements that won’t be affected by a crisis. If a crisis strikes and they are unprepared, then we encourage executives to seek solutions, using the strategies we have covered in this book, to survive even if it means shrinking.
During crises, a lot of companies experience a drop in demand for their product or service, so they depend on cash flow to survive. Maximising cash flow requires understanding the drivers of cash and profit and then deliberately moving those drivers in the desired direction. Those of you who have come to our workshops and have read our ebook How to Double your Cash flow Overnight would have already heard us talking about cash flow improvement and how to use the 7 financial levers to drive cash and profit. These drivers are not new to any business. What is new is the clever ways of describing how they could be used to maximise your cash flow and profitability in times of crisis, when the stakes are high. And this is what we also go through in our virtual event Insider’s advice on maximising cash flow during the Pandemic.
If your business has been affected by the crisis, then that is a sign that you have some improvements to make and now that you have the time on your hands, use it to strengthen relationships, innovate and make your business finance and cash flow more robust.
It is really important to keep open-minded about the way you run your business now. Take an innovative approach in the way you do things, observe what happens, and read our book “Maximise Your Cash Flow During Crises” where we discuss this topic in depth.
Our new book "How to Maximise your Cash Flow During Crisis" will give you the confidence you need to deal with the uncertainty during a crisis:
How to prepare for crisis
How to deal with crisis
How to maximise cash flow during crisis
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