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The Four Pillars of Cash Management

The Four Pillars of Cash Management

These are surreal times for small business. As the reality of the Pandemic has been woven into the fabric of our collective psyche, businesses and consumers alike now have begun to accept the inevitable chain of events as simply a part of our modern existence. Businesses cling tightly to hope for a quick and efficient recovery, and individuals patiently sit in the dark waiting for the world to open in a rational, ordered, and healthy sequence.  Our economy contracted by an annualized 4.8% in the first quarter, with deeper wounds expected to be inflicted in the second quarter as millions were furloughed, companies shuttered, and cash became the anxiety for us all.

The bottom falling out of the economy acutely impacted small businesses. Over 7,500 small businesses were surveyed, and the results were published by the National Bureau of Economic Research.  The results showed massive fragility in the sustainability of cash levels, whereas some businesses had less than two weeks of cash, and the stronger ones stored up to two months. While the CARE act should help to mitigate, many businesses see the funding as administratively burdensome, wrought with caveats, and quickly disappearing as small and big business alike wrestle for the dollars.

How Are Small Businesses Adjusting To COVID-19?

For small businesses, this is about two emotionally charged issues. First, the health and survival of their own families and employees (which is clearly most important), but also – cash.  Cash is the lifeblood of small business. But there are so many question marks of where our economy is headed from a macro level, but also at a local community level as well. For small businesses to survive, recover, and thrive in these ‘worst of times’, I’d propose that there are four financial fundamentals that businesses need to understand and nail from an insight and intelligent perspective:

  • Working Capital –In the simplest terms, current assets minus current liabilities. Think of working capital as stuff that you can quickly turn into cash (less than a year, but really the quicker the liquidity the sweeter), minus the firms you need to pay within a year.  Managing this metric means understanding where your cash is tied up – and accessibility. But also, managing Accounts Receivable. If your customers have been furloughed, it is highly unlikely they can pay you as promised. Know your aging, know your own credit policies, and reach out to your biggest customers. Working with them on payment terms will go a long way in retaining their loyalty once the world reopens. Knowing their circumstances helps to manage your own cash inflow expectations.  If you carry inventory for resale, ensure that you have rational levels (this is cash, sitting on a shelf, collecting dust). Inverse to the asset management, working with your own vendors and creditors on payment terms. Extending due dates and prox terms buys you precious time in the cash conversion cycle.
  • Revenue/Sales – The biggest question mark. If you are still open for business, or will be reopening shortly, getting into the minds of your customers is paramount. Throwing open the doors of the local economy does not mean that your customers will cartwheel into your business showering you with cash. Predicting revenues in the most stable of times is wrought with risk and unknowns. In the Covid era, its akin to guessing lottery numbers. Get in front of this by reaching out to your customers and feeling out their own personal recovery plan.  Understand how your firm acts in the broader economy, and if your revenues correlate with the GDP.  Paint a revenue forecast picture, best case, worst case, and most likely. This will allow you to quickly pivot and act. Remember, every dollar of revenue started with the microeconomic decision from an individual.
  • Capex / Fixed Assets. A cash eating monster. To grow your business, you need to invest in capacity, replacement, productivity, and technology.  Understand the intent of every planned Fixed Asset purchase, what can be postponed, and what is crucial. Once the recovery is in full swing, hopefully late summer or sooner, will you have the capacity to meet demand? Will the new normal of business transactions and customer interaction require new and innovative delivery methods? Businesses that are technologically equipped to delivery in safe and efficient manners win the prize of customer loyalty.  It is about perception of the customer, and what feels safe and sustainable.
  • Fixed vs. variable costs. In the long run, all costs are variable, but in the short run businesses have costs that are not legally optional. Rent, leases, and other contractual costs. While some landlords are working on postponing payment, these are not going away. Staffing is tricky. While no business owner does not want to furlough staff, determining labor tied to production levels vs. administrative helps to make thoughtful decisions in a very emotionally charged environment.  The higher a firm’s fixed costs, the higher the breakeven point.  This is known as Operating Leverage. Understand how sensitive your EBIT changes are in relation to your revenue changes. A company with high operating leverage has a large proportion of fixed costs, which means that a big increase in sales can lead to outsized changes in profits.

The U.S. economy is deeply dependent on personal consumption expenditures. More than 25% of the GDP is consumption expenditures by households that make less than $70,000 a year. So when those households, like today, get hit very hard with layoffs, and those consumption expenditures drop, it has a trickling down impact on the small business community. Being keenly aware of this, and understanding the four cash fundamentals can help give every small to mid-sized business a fighting chance.


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