EFFECTIVE PRESERVATION AND DEPLOYMENT OF CASH

Issues Businesses Are Facing

The most critical aspect of any recovery is the effective preservation and deployment of cash. Spend too much, and the cash can run out before recovery. Spend too little, and the business may not be in a position to succeed. Improper cash management can lead to numerous consequences.

• Run out of Cash: Overspend on the wrong resources and cash does not survive the downturn
• Run out of Resources: Spend too little and possibly lose valuable resources necessary to recover
• End up with the wrong resources: Spend incorrectly and reduce your capacity to recover including key personnel
• Effective Loan Management: Several of the government assistance programs like PPP are strict in the application of funds and conditions required for forgiveness

Baseline 13 Week Detailed Cash Flow Projections

Effective cash management is far more complicated than a company’s standard Statement of Cash Flows or monthly cash flow projections. The Statement of Cash Flows was designed to be backward looking, whereas the typical cash flow projections are based on general balance sheet ratios (DSOs, Inventory Turns, etc.) and normally are directional in nature on a monthly, quarterly, and yearly basis.

During times of distress, companies must get far more granular in their understanding and execution of weekly, or daily, cash flow management. This involves a detailed understanding of the projected cash receipts and disbursements over the coming weeks.

• Cash Receipts: Understand the potential cash receipts in the coming weeks with the expectation that many customers may not be in a position to meet their payment obligations.
• Employee Expenses: Break down your employee expenses on a weekly basis. For many companies, employee compensation is the largest expenditure. Management of this resource is critical during the crisis but is also equally important for any future recovery.
  • At current levels, lay out current payroll needs on an employee by employee basis
  • Understand the timing of each disbursement including benefits and taxes
• Supplier/Vendor Expenses: Break down projected cash disbursements on a weekly basis
  • Understand your account payables and timing of each required payment
  • Project current expected invoices for typical expenses and critical expenses to keep the doors open
• Debt Payments:
  • Understand debt payments for the 13-week period
  • Also understand the available capital resources such as credit lines and government programs
• Understand capital projects currently in process
  • The knee-jerk reaction is to immediately stop all longer-term capital projects
  • If possible, completion of some of these projects may position the company for a quicker recovery; we address this topic in Tool 5: Driving Innovation

Prioritization of Cash Receipts and Disbursements

Once the baseline is established, it is important to analyze and to prioritize disbursements to stretch out a company’s current and projected available capital. Part of this prioritization is understanding the flexibility a company has in stretching out payments to key stakeholders such as employees, vendors/suppliers, and debt holders.

• Cash Receipts: While it is not farfetched for companies to assume that there will be little or no cash receipts during the crises, there are still customers in need of services that will be in a position to provide some of the expected cash.
• Employee Expenses: Human Resource management will be one of your most critical decisions in the coming weeks. As you create your resource plan, certain questions should be addressed such as:
  • Who is necessary to keep the lights on?
  • Who can be retained at lower compensation through the crisis?
  • If you lay off or furlough employees, who will be available for rehire?
  • Who is necessary to better position the company for recovery?
  • Who can be temporarily replaced through outsourced services at lower cost?
• Supplier/Vendor Expenses: Managing key supplier relationships though this crisis will be key in determining your survival and ability to recover.
  • Communication, communication, communication. Now is not the time to “ghost” your vendors or suppliers. Companies that maintain strong relationships through the crisis will be those who build the foundation for the future
  • Hard Choices: Many companies will not be able to pay all vendors. Decisions on which ones to fully pay, versus which ones to partially pay, versus which ones to defer should be made in context of the overall cash management and recovery plans
• Debt Payments:
  • Most lenders will work with companies during the coming weeks
  • To do so, lenders need to be included in the plan
  • Communication is key
  • Properly manage any government loan programs for maximum effect or forgiveness
• Understand capital projects currently in process
  • Understand the short- and long-term implications of each project before making any decisions

Sensitivity Analysis

All cash flow projections include a wide variety of assumptions. Which customers can or will pay? Which vendors/suppliers are willing to extend terms? Which employees are critical?

Even after prioritization, many companies will not have a clear path to survival. Important tradeoffs need to be made. To make a tradeoff, the company needs to understand how each moving part impacts the others. To do this, the company needs to perform a sensitivity analysis in which each cash source and use is adjusted over the coming weeks.

Effective Loan Program Management

As mentioned above, effective management of government loan programs may be the difference in a company’s survival.  If a company is fortunate enough to have received funding from the various programs such as EIDL (Economic Injury Disaster Loan) or the PPP portion of the CARES Act, how the company utilizes the funds will not only affect their long-term viability, but will also impact how portions of the proceeds may be forgiven.