Keeping the cash flowing

The old adage that ‘cash is sanity and turnover is vanity’ has never seemed more relevant. Walter Hale provides cashflow pointers for those of you struggling to make ends meet.

1. Lead by example

Even before Covid-19, some managers treated cashflow as if it was a new religion. Others were happier to incur debt in pursuit of growth. Yet in times of crisis, cash is king and managing it wisely could save your business. If you don’t appear to place great importance on cashflow - and remember what you do is more important here than what you say - your employees probably won’t either. Good cash management requires every department to cooperate. If they don’t, you will only discover process inefficiencies when they become too obvious - and expensive - to ignore. 

Historically, businesses owned by Warren Buffett have consistently generated cash because he has put that at the heart of their culture. He looks at projected cashflow per share over five years before acquiring a business, and says managers need to think laterally about how they use cash because it can often be a mistake to invest money where you’ve earned it. It is also true that no company - not even one owned by Buffett - is perfect when it comes to managing cash - precedents, workarounds, cutting corners happen in every business. By showing staff you have bought in to a back-to-basics approach, you can eliminate these and manage cash more efficiently.

2. Think like a private equity investor

With a business model based on deriving value from the indebted businesses they acquire, private equity investors spend the first 100 days in charge estimating how much cash they can generate without hurting the business to reduce debt and improve working capital. The exercise can highlight particular parts of the business that aren’t generating enough cash so managers can either fix this or close the unit down. Legacy costs, which often fly under the radar, can also be exposed.

3. Drill down

In a volatile business environment, it makes sense for companies to forecast their cashflows every week, looking ahead for 26 weeks, rather than the usual 12 and taking a granular approach to receipts and payments. If you understand your payment position on payroll, suppliers, bank interest, rent, tax and pensions, it is easier to decide which are most critical. You can then prioritise the kind of help you might need and from whom, whether it be a small business loan from the government, support from an existing lender, funds from a new lender or a deferral from the landlord. If you know what the figures are, and can share them with stakeholders, your arguments for help will be much more persuasive.

4. Talk to people

You may be able to bring cash into the business by being more vigilant about when payment is due, changing payment terms, discounting for early settlements and requesting some - or all - of the money upfront. You may also find that customers, especially in the public sector, are willing to embrace informal schemes to help you cope with unexpected costs. 

Whatever steps you have already taken, be sure to stay in touch with the bank. There is some truth in Mark Twain’s famous definition of a banker - someone who will lend you an umbrella when the sun is shining but wants it back the moment it starts to rain - but avoiding lenders when a problem arises, which a surprising number of companies still do, is only going to make things more difficult to resolve.

5. Use your technology wisely

Although we are gradually, finally, exiting the age of the spreadsheet, many companies are not making the most of the systems they have acquired. If your shiny new management information system isn’t improving your cashflow as expected, it may be because your staff aren’t using it properly, the technology doesn’t suit your business or, quite possibly, a bit of both. There are now many easy to use, low cost (or free) cloud-based software programmes that can help you manage cash. Astonishingly, the one lesson that many companies in different sectors have still not learned is to make it as quick and easy as possible for their customers to pay them.

6. Be brutally honest

Too many business forecasts are clouded by wishful thinking or internal politics. The inevitable result is that most companies don’t achieve their forecasts most of the time. When it comes to cash management, such failures can be catastrophic. Ask yourself: do staff really believe these forecasts or are they really just moving the data around to meet our targets? The risks of forecasting too bullishly are obvious and well publicised but it is also true that businesses which are too cautious can fail to meet demand in an upturn.

7. Encourage debate

With cashflow now such an urgent priority, many leaders will be tempted to hunker down with the finance director, compile a list of cost savings and present that to stakeholders and staff as a fait accompli. Making decisions quickly is good, making the right decisions quickly is even better and you are more likely to do that if other people, especially those with dissenting opinions, are involved. It may not be possible to engage everyone in the process but be as inclusive as possible. Shop floor staff may understand why a particular measure, which looks good on paper, is actually a false economy.

8. Reflect, reappraise and reconsider

Understanding cashflow in granular detail should clarify your view of the business. You will probably have identified ‘soft’ spending that you can cut without damaging the business. You may also have identified spending that, over the medium to long term, you can shrink. For example, how much does it cost your company to operate its fleet vehicles (both cars and trucks)? Before the pandemic, this expense was rising by more than 2.5% a year for a typical British SME. Fuel prices were partly to blame but, even if you discount that factor, there are probably ways you could run your fleet more economically. The obvious one being to shrink it or mandate a shift to electric vehicles. 

There is also spending that you could cut, but at the risk of damaging your business. That should always be the last resort. Revamping your website - or fixing some of the glitches with your Web-to-print/e-commerce solution - may not seem critical, but maintaining such investments may put you in a better position when the recovery gathers momentum. If you are fortunate - or brilliant - enough to be cash rich, you may find that now is the opportune time to acquire a company for a good price.

9. Save for a rainy day

Many print service providers already say that cash is their best form of insurance. In an ideal world, every company should have enough money in its accounts to pay operating expenses for the next two months. That may be difficult to achieve in the current economic turmoil but it is still a good long-term goal as the market returns, however erratically, back to something we recognise as normal.

10. Stick with it

Cashflow management is not something you do once, fix and move on. A disciplined approach to cash can create value for your business. It may be appropriate to start the process with shock measures - such as a regular, intensive scrutiny of costs and volumes - to focus managers’ minds. That can also help reduce the risk that, as business recovers, you engage in impulse spending instead of prioritising your cash reserves. If you look at the big picture, optimising cash flow can seem complex but simple steps deliver simple gains. 

Defining what the ‘new normal’ might look like, when the pandemic is under control, has become a global sport. Yet Bill Gates, who knows a thing or two about change, was surely right when he said that we are hard-wired to overestimate change in the short-term - and underestimate change in the long-term. One prediction for a post-pandemic marketplace does seem fairly safe: cash will reign supreme for a while yet.