Download: Scenario Planning Worksheet
If you are a business owner right now, you’ve probably already spent hours going through all the possible options for what the future holds. There might be more questions than answers at this point. How long will the impacts of Corona virus last? Will there be a recession in 2020 or will this be a temporary situation that will resolve itself in a few months? To help you think strategically and stay in action around your goals, we’re sharing this Download: Scenario Planning Worksheet which we use internally with all the people we work with. As small business consultants in Austin, we’ve helped business owners implement all of the strategies listed below for managing cash flows when money gets tight.
First we list the top 5 things you can do to generate cash, save cash, and finance a cash crunch. Then we’ll share some quick tips on how to think through this type of situation. Towards the end we list out even more things you can do to protect your cash flow.
Top 5 Ways to Generate Cash in a Crunch
1. Run a Flash Sale: This can help you get cash in the door quickly and make payments on upcoming cash outflows including payroll. There are many creative ways to run a flash sale. Don’t limit yourself to traditional methods in your industry. For inspiration, look at what businesses in other industries do. You can run specials on core products, you can liquidate older products, you can pre-sell products or services which you will deliver on in the future and so on. It may even be worth it to include a small amount of spend on awareness campaigns to generate traffic. Just be sure to consider the actual gross profit from sales which will remain to cover staff and operating expenses when using this tactic.
2. Lean on Loyal Customers: There is nothing like a fan base to tap into in hard times. These people love you and your business, so don’t be shy. You can send out a mailer, you can ask for help. You might be surprised at the things people are willing to do to support your business and community. This can range from a special iteration of a mailing list campaign you already have going, to a shout out on social, or even a text messaging campaign.
3. Re-Market to Old Customers: Generate some lists and run some quick numbers on your customer history. Find customers you can circle back around to with a deal. Don’t just rely on your memory. Run a quick export to excel from your point-of-sale systems to help generate some ideas. Are there any customers who haven’t been back in a while? What about loyal customers who used to buy often and stopped at some point? Any who may have purchased once who you could follow up with? You can also use all this information to craft a more effective flash sale (see above).
4. Run Co-Marketing Campaigns: Consider ways to team up with other like minded business owners with products in a complementary space. These might be folks in your friend network or someone you know may be able to refer you. Get in touch and bounce around some ideas. Focus on relationships that are consistent with your brand and be sensitive to the current situation. You can run special product offers together with creative combinations of your products and services. You can run specials, buy one of these, get this % of of those, and so on. This is mainly a traffic play, you get your products in front of more people by sharing audiences.
5. Collect A/R & Invoice Early: For service businesses who invoice customers this one is huge. Many more business owners than you might expect carry really large A/R balances. This can be one of the quickest ways to get cash in the door. People delay payments for so many reasons including simply being too busy. You might be surprised what you can collect by just reaching out and moving the ball along. You can collect partial payments, you can reach out with small touches starting with an email and escalating to a phone call. Consider being transparent about a cash crunch you are dealing with. For large enough amounts and as a last resort you can bring in legal counsel. Another related tactic is to simply get cash faster by sending invoices faster in smaller amounts and/or reducing payment terms. Many customers who get terms will push payment to the last possible moment.
Top 5 Ways to Save Cash in a Crunch
1. Consider Slowing Down Growth: Growth tends to consume cash. Depending on the unit economics of your business, it may make sense to let up on the gas and service fewer new customers for a few months. If you are pursuing growth, beware of “step function costs” that can take your margins from healthy to unhealthy when your current customer cohort expands. Consider the trade-offs between going into survival mode and continuing to pursue growth. Many of the things in this list can help you better capitalize your business before getting back into growth mode. This is a strategic decision all owners must make, and is best made with a high level of visibility into your financials including cash conversion cycles, margins, and unit economics.
2. Decrease People Costs: People costs are often the largest operating expense in a small business. Considering layoffs or reductions in pay can be scary. That said, there are many ways you can get creative to decrease people costs while retaining your most valuable asset: your people! First identify who exactly your key players are and which ones you’ll need with you to scale once the business goes back into a growth mode. Also consider cutting owner/partner payroll or skipping a pay period. Once you know what your priorities are, you can create tiered pay reduction structures for the various groups. While sometimes it’s necessary, these cuts don’t have to be made all at once. You can implement a scaled structure where you make decisions for only the next pay period, or the next 1 month, and so on at time. You might be surprised to find employees willingness to “pitch in” to a team effort by taking a pay cut or deferment, especially if they are able to keep benefits in tact. In extreme scenarios, many types of employees can recoup costs of living through unemployment programs.
3. Reduce Non-Essential Operating Expenses: Take a look at your operating expenses at a transaction level by exporting them from your books and ask yourself if any of those can be cut or put on pause. You will inevitably find some app or subscription for $20-50 bucks here and there. If you find enough of these savings, they can add up quickly.
4. Push Back Vendor Payments: Categorize your vendors/suppliers into essential and non-essential. Think of essential vendors as the ones that are absolutely critical to you being able to generate future revenue. Pushing back non-essential vendor payments will cause inconvenience but won’t cause an existential threat to your business. Starting with your non-essential vendors, call them and be up front with them. Let them know that you’re looking to set up payment terms. They aren’t going to be thrilled with it but getting their bill eventually is better than never. Tread carefully with essential vendors as they may be spooked by your need to conserve cash. If you find they aren’t willing to budge, consider sharing more about the severity of the situation.
5. Ask Your Vendors For Discounts: If you’ve built good relationships with your vendors, there are lots of ways you can work with them to improve your pricing that still create win-win results. Are you a large contributor to market share in your area? Are you a valued distributor? Can you get a discount on older products that are sun setting? Can you work with them to run sales and discounts on products that are having low sell through rates in your area or nationwide? Can you spread out an annual payment even if you signed up for them? Again, it never hurts to ask.
Top 5 Ways to Finance a Cash Crunch
1. Do a Shareholder Loan: This is where you write a check from your personal account to your business account. If you have partners you can ask them to do the same. This is probably the quickest and easiest to execute. Consider treating this the same as you would any other loan by documenting it in a promissory note agreement and setting a market interest rate for yourself, especially if you have investors or partners. While it’s ok to set flexible payback periods, take into consideration how these transactions might look to potential investors, lenders or partners down the road. Also pay attention to how they get booked with your bookkeeper or admin team. Sometimes funds that are meant to be shareholder loans accidentally get booked as equity. This is also fine but has different implications when pulling money out later and can cause confusion for the cap table if you have other owners in the business.
2. Apply For A Credit Card: In tight times, it can sometimes make sense to apply for a business credit card as they often offer introductory low or no interest terms that can buy you time to organize a more appropriate solution for upcoming cash outflows. Be aware of the risks involved and make sure the spending you’re making is absolutely worth it. These typically have to be personally guaranteed so make sure you understand the probability of the long term prospects of this business and its ability to service the debt in the future.
3. Get a Line of Credit: A Line of Credit can exist in many forms but it’s basically a big credit card for a business. You are only charged interest on the money that you withdraw. Often referred to as a LOC, these can be both secured by existing assets you have in your business, or unsecured. Like a credit card, both forms will most likely require a personal guarantee so make sure you understand the probability of the long term prospects of this business and its ability to service the debt in the future.
4. Liquidate Inventory: Believe it or not, sometimes a downturn is the perfect time for you to take a hard look at your inventory. Most retailers have inventory that they know is going to take a long time to sell and that cash has a higher and better use today, therefore it shouldn’t be tied up in old SKU’s. Think of inventory as a bunch of cash just sitting on your shelves or in your warehouse. You can have a flash sale or if you want to move a lot of product, it might be time to reach out to a liquidator that will purchase a ton of inventory at a time typically at a discount.
5. Do a Friends and Family Raise: Many business owners we know including ourselves have at one point or another have done a quick raise from friends and family to help get out of a tight spot. There are a number of regulations around this and it’s best to speak with a securities lawyer to help you make sure that if you go this route, you do everything by the book. There are certain people that you are or are not allowed to take investments from and there are certain things you are allowed or not allowed to say as you solicit investment.
The Sources and Uses of Cash Framework
Here are some guiding principles as you consider your options:
Principle 1: Match the size of the solution to the size of the problem. Before taking action, take a step back and size up the situation. If the problem is short term, consider short term solutions (quick sales, short term credit, vendor negotiation, commission furloughs, payroll reductions, and so on). If the problem is longer term, consider longer term solutions (long term debt, equity funding, pricing strategy adjustments and so on).
Principle 2: For financial planning, the smaller the cash reserve, the shorter the time frame. If you have 6 months of runway, then you can use a monthly cash forecast for planning. If you have less than 2-3 months of runway, consider looking at sources and uses of cash on a weekly basis. To calculate your runway, first add up all your average monthly expenses, then subtract out expected monthly revenue. This is your net burn rate. Then get your current cash balance and divide it by your net burn rate.
Principle 3: Be proactive instead of waiting. This is probably the most important. One of the most stressful parts of being in a cash crunch is the uncertainty that can make you feel stuck. To deal with this, address the problem by thinking through it critically instead of waiting for bad things to start happening. Be realistic about how your business will actually be affected by key stakeholders, your customers, suppliers and your workforce. Use simple tools like this Download: COVID 19 Scenario Planning Worksheet to help you stay in action even in difficult times.
It’s important to keep in mind why you started doing this in the first place when you get in a tight spot. This can give you the energy you need to get through it regardless of the operating environment you find yourself in. Focus first on finding a new baseline for operations then find ways to be creative. Every environment presents opportunities as well as challenges. There is always something you can do to keep moving towards your bigger picture goals.
Finally here is a brief list of additional things you can do to get the creative juices flowing.
Other Ways to Generate Cash
Offer Upfront Payment Discounts: You can offer a percentage discount for upfront payment. Think of the percentage as comparable to the interest rate you would have to pay on a loan.
Examine Your Pricing Structure: Take a look at your gross margins and unit economics by product. If cash flow is an ongoing issue you may be leaving value on the table that could be captured in your pricing.
Set Up Auto Billing: A simple and often overlooked way to increase cash inflows. This can be done relatively easily in your current invoicing, accounting, or point of sale system. Here’s how to set it up in different systems: Quickbooks, Xero, Bill.com.
Incentivize Non-Sales Staff For New Business: Enroll all employees into becoming salespeople for a while. Driving this new behavior needs to be SIMPLE. Write out a step by step process for them to follow to generate traffic or leads.
Accept Online Payments: Integrate into Quickbooks, Square, Paypal, or really any other online payment portal. A quick Google search will help you see how many options there for adding payment portals and checkout carts to your website.
Other Ways to Save Cash
Scrutinize Purchase Decisions: Keep a very close eye on all new purchase decisions and make sure any asset purchases (inventory, property, plant, equipment) are signed off on and are absolutely essential to continuing operations.
Switch To Paying With Checks: You can buy yourself whatever time it takes for your vendors to process manual checks. Beware of having cash set aside for outstanding you’ve written.
Join A Buyer’s Group: This is a way for small businesses to pool together their purchases to get discounts that a larger firm would get for volume. These typically have a membership fee that you get back in the form of credits to purchases.
Run Consignment Sales: Ask vendors if you can go to a consignment model in the short term. You will have no cash outlays when receiving product but you will generally earn less gross margin on products for this.
Negotiate Payment Terms: See if you can get better terms from vendors, especially those you maintain good relationships with.
Other Sources of Financing
Refinance and Consolidate: Get quotes on refinancing any debt the business is carrying. Consider shopping your debt around on a regular basis. Lenders are always trying to lend and they will often compete for your business.
Sell Non-Essential Assets: This can be anything from an extra piece of factory equipment that you may not need or use anymore. Non-Essential assets are ones that you could sell and your company could still operate.
Get Inventory Financing: Many lenders will lend against inventory. Different inventory typically has different “residual value”, meaning the amount of cash for which it could be liquidated. Depending on the lenders confidence in your ability to sell your inventory, they may lend more or less against the value of the inventory.
Finance / Factor Your Invoices: Warning – risky and potentially predatory – Invoices from customers are technically assets if they can be reasonably expected to be paid. With Invoice Financing, you retain control of the invoices and the lender assumes you will use funds from collections to make payments on the loan. With Invoice Factoring, a lender will purchase your invoices and then assume the collections process themselves. There are all sorts of red flags that this can signal, and some firms are more professional than others in this process.
At the end of the day, all of these “strategies” can work if implemented correctly. If not, then they can be detrimental to the business long term. We never want to use a permanent solution to a temporary problem or vice versa. Being a small business consultant means getting into the weeds, acknowledging the scarcity of resources, and getting creative with problem solving. You don’t have to go it alone!
If you seek a community of other business owners looking for ways to build a self sustaining business for themselves, join our Facebook group: Building A Business, Not a Job.