Wealth Warning

You must not simply use the techniques outlined in this chapter to obtain more cash, particularly by increasing your borrowings or by taking further credit to stave off an inevitable collapse. If you do, as a director you will be running risks of personal liability for wrongful or even, possibly, fraudulent trading (see Chapter 11).

The purpose of this chapter is to help you to weather a cash crisis in order to put a turnaround plan into place, with some reasonable chance of success. If you are in a cash crisis and you have (or it would be reasonable to have) any concerns about whether there is any prospect of the business surviving, you must take professional advice to protect your personal position.

Achieving Balance

In a cash crisis, your business’s short-term survival depends on you 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 before 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 should adopt an approach that balances short-term survival with long-term regeneration.

Unnecessarily closing the factory you will need for your long-term recovery as part of your short-term cost-cutting plan tends to look not too clever in hindsight. But if it is a case of close the factory or go out of business, don’t hesitate – close the factory! Remember, you will not be around to worry about implementing your turnaround plan unless you have enough cash to pay the wages and suppliers this week and the next.

The Key Steps To Survival

A cash crisis can arise for a number of reasons, ranging from operating losses or the servicing of excessive debts draining the cash away to excessive capital expenditure or inefficient trading operations absorbing too much cash into illiquid assets, through to too high a rate of growth where the supply of cash is too slow.

To survive a cash crisis you must focus on some or all of the following key areas, although the steps you need to take will be determined by the underlying cause of the cash shortage:

Generally, the first five areas have quicker effects than the last two, and your cashflow forecast will show how pressing the crisis is.

One way to prioritise actions is to use a matrix such as the one shown in Figure 13 to plot your estimates of which actions will have the largest/fastest relative effects so you can focus on those that will make a real difference.

Fig. 13.

Prioritising actions.

If you can demonstrate you can identify, face up to and deal with a severe cash crisis by taking the actions necessary to survive, you will increase your credibility with stakeholders (particularly your bank).

Controlling The Cash You Have

It is surprising how many businesses that are 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. First, prepare a cashflow forecast. From this exercise it will follow logically that, to manage the business’s cash efficiently, you should take the following steps:

• Centralise the 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 managers, 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 that can be used to improve the next forecast’s accuracy.
• Increase the level of authority required for purchasing or payments. Credit/charge cards should usually be cancelled or restricted so that cash is not wasted or committed outside the central forecasting regime.
• By preparing a 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, target these areas for specific reviews and remedial action.