Critical Care for Companies^®

Turnaround Step 6: Stop Bleeding Cash

Why you should read this section

• As a distressed business if you run out of cash the game is over since it will be very difficult to raise money through external loan & investment sources. This section shows you how to avoid this problem

• There are 3 tools that will greatly assist you in managing your cash. Find examples of those tools here

Rule number one, never run out of cash

Rule number two, never run out of cash

Rule number three, never run out of cash

Rule number four, when in doubt see the first three rules!! 

---The 4 rules AV Labs, a new venture accelerator, gives to companies they are investing in--- 

How to avoid running out of cash

In order to not run out of cash, you must first answer 4 questions:

• What is your present cash position?

• Based on your present cash position, when will your company run out of cash?

• How can you reduce your cash burn rate?

• How can you increase the cash into your business?

What is your company's current cash position?

To answer this question, you will need an understanding of cash flow forecasting. Of course, if you have a competent financial person on your team as I hope you do, then simply handing off this deliverable is first prize. In the same token, you may not have this person on your team or you may need to gain a better understanding of the tools and processes necessary to understand your cash position. If that is the case…read on.

The best example, in terms of cash flow format, that I have found comes from "The Insider Secrets To Saving Your Business: The Step By Step Turnaround Guide" by Kevin Muir. I have used this guide (and this cash flow format) on a number of turnarounds and highly recommend it. Click here for for information about this publication.

If you need additional assistance with this very critical business skill, click here and you will be re-directed to the SBA website for additional tools and instructions.

You should conduct this cash analysis on a weekly basis. If that seems unrealistic then semimonthly would be the absolute minimum while your company is in a distressed state.

Your cash projection should be made for 90-120 forward-looking period. In addition, it should be "rolling". That is, as 1 week ends, it drops off and you add another week so you always have a constant 90-120 day period.

Tips for conducting a cash projection analysis

• Start with a foundation of business as usual. In other words, as you forecast, use the assumptions that your expense burn rate will not change, sales & collections will remain similar to what they have in the past, etc.

• When conducting this analysis, always remember Murphy's Law: "If something can go wrong it will".

Anybody who has every done a turnaround will know how true Murphy's Law is. When making your cash projections, plan for the worst case…just in case. For example, two issues that arise often during a turnaround are the deterioration of receivables and acceleration of payables. This will happen for a variety of reasons but just be prepared for these types of situations.

Now that you have an estimate of when your company will run out of cash, it is time to go to work on reducing your cash out and increasing cash in.

The most immediate opportunity to increase cash flow into your business is through more aggressive management of your Accounts Receivables. The tool to use is called Accounts Receivable Aging analysis. The SBA has a website that addresses the issue of managing Accounts Receivable. Click here to go to the SBA Accounts Receivable website.

The next area to address is Accounts Payable. Again, doing an aging of your Accounts Payable will be a very valuable exercise. In addition to the aging, you also must prioritize your supplies by asking the following question: Which suppliers are absolutely critical to the continued operation of the business?

Pay expenses in the following order of priority:

1    1.  Payroll and payroll taxes

2    2.  Rent and utilities

3    3.  Secured loans and leases on essential assets

4    4.  Purchases on essential supplies and inventory

 Click here to go the the SBA Accounts Payable website to see the aging analysis.

Finally, here is a list of ideas on improving cash flow:

1. Increase sales (particularly those involving cash payments).

2. Reduce direct and indirect costs and overhead expenses.

3. Defer discretionary projects which cannot achieve acceptable cash paybacks.

4. Increase prices.

5. Review the payment performances of customers - involve sales force.

6. Become more selective when granting credit.

7. Seek deposits or multiple stage payments.

8. Reduce the amount/time of credit given to customers.

9. Bill as soon as work has been done or order fulfilled.

10. Improve systems for billing and collection.

11. Use the 80/20 rule to control inventories, receivables, and payables.

12. Improve systems for paying suppliers.

13. Generate regular reports on receivable ratios and aging.

14. Establish and adhere to sound credit practices - train staff.

15. Use more pro-active collection techniques.

16. Add late payment charges or fees where possible.

17. Increase the credit taken from suppliers.

18. Negotiate extended credit from suppliers.

19. Make prompt payments only when worthwhile discounts apply.

20. Reduce inventory (stock) levels and improve control over work-in-progress.

21. Sell off or return obsolete/excess inventory.

22. Utilize factoring, or discount facilities, to accelerate receipts from sales.

23. Defer or re-stage all capital expenditure.

24. Use alternative financing methods, such as leasing, to gain access to the use (but not ownership) of productive assets.

25. Re-negotiate bank facilities to reduce charges.

26. Seek to extend debt repayment periods.

27. Net off or consolidate bank balances.

28. Sell off surplus assets or make them productive.

29. Enter into sale and lease-back arrangements for productive assets.

30. Defer dividend payments.

31. Raise additional equity.

32. Convert debt into equity.

Remember, more then anything else, you must get control of your cash. No hiring, no capital expenditures, and no purchases without your authorization!!

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