Surviving a cash crisis – Fundamentals

 Surviving a cash crisis – Fundamentals

(This article originally appeared on the SurvivalWare website several years ago.  I thought it might be helpful in these turbulent times). 

This article is intended to give you a common sense, rational approach to assessing how bad things are, and to use the information to help craft a way to survive until things improve.

You can follow the basics using a spreadsheet package such as Excel. SurvivalWare’s Cash Planner module is another tool that can help you deal with a cash crisis, and is especially good at handling the uncertainty associated with when sales are made and when the money is actually collected. Predicting cash flow can make forecasting the weather look easy by comparison.

The detailed example shown below is based on a true set of circumstances. Many of the names have been changed to protect the privacy of the participants, and the dates have been changed to 2002 to further disguise the numbers. The entrepreneur actually survived, and the company is still in business.

Setting the stage

It is hard to be rational when it feels like the world is closing in, like you are traveling 70 MPH about to hit a brick wall. With no airbag. Or seatbelts. And leaky brakes. The road covered with oil. Your life starting to flash before your eyes in slow motion.

I can feel your pain!

You’re in trouble. You’re not sure how bad, but it feels awful. You don’t know how you’re going to come up with the rent due in 3 days, not to mention payroll the day after. You’ve got some receivables, and there are sales trickling in.

Don’t feel guilty about running low on funds. If you wait until you save enough money to take the plunge and start your own business, you’ll never get your business started. Even if you raise big bucks up front, it is never enough. There are unknowns and things beyond your control. Running lean for a few years is great discipline. If you had a big chunk of money when you’re just starting off, you’d find some way to convert it to a small chunk of money and wonder where it went. So there is a silver lining to this cloud.

Some fundamentals

But first some fundamentals. Let’s take a dispassionate look at your situation. Can you survive the next three months?

A real broad brush look is to take your current cash balance, add in unused “credit lines” (i.e. Visa and MasterCard) and then look at collections and expenses the next 3 months. Here’s what it might look like if you’ve had a few bad months:

  Jan Feb Mar
Cash $ 5,000    
Credit Limits 100,000    
Less: Borrowings 80,000    
Unused credit 20,000    
       
       
Beginning Cash & Equiv 25,000 17,500 10,000
Expected collections 15,000 15,000 15,000
Payments Due 22,500 22,500 22,500
Ending Cash & Equiv $17,500 $10,000 $ 2,500

Not pretty, but you muddle through the next three months.
Here’s what it might look like if collections are just $5,000 less each month:

  Jan Feb Mar
Cash $ 5000    
Credit Limits 100,000    
Less: Borrowings 80,000    
Unused credit 20,000    
       
Beginning Cash & Equiv 25,000 12,500 0
Expected collections 10,000 10,000 10,000
Payments Due 22,500 22,500 22,500
Ending Cash & Equiv $ 12,500 0 (12,500)

That (12,500) at the end of March means you’ve gone bust. It is when you see a problem here that you need to do some more detailed analysis and work. Otherwise, you can quit reading this article and go have a beer.

Don’t panic. Things could be worse. If you believe in the basic soundness of your business idea there is a way to muddle through. I had to chuckle recently when a friend told me that his firm was in dire straights – down to 30 days of cash. Heck, I know people who have gone 10 years at a stretch without getting up to 30 days of cash.

A more detailed look

First things first. If you’re already behind as opposed to just having a sense of impending doom, you need to work quickly. You need to devote an intense couple of hours to analyzing and worrying about the problem. This should give you two to four weeks before you have to look at things again. This is the key: do some intense work on the problem, decide on a plan, and then tend to your business for a couple of weeks at a stretch without worrying about it. (I know – easier said than done). 

 

Step 1: List of Payments Due

First, make a list of all the bills that are due and overdue. You can do this in Excel, Word, notepad, or on paper. It’s best if you do it in Excel, because then you can sort by date, and sum by week. The important thing is to make the list.  A good place to start is to look at all the checks you’ve written the last couple of  months.

Extend the list out for the next 3 months. Include target due dates. Group cash needs into categories, starting with Payroll. Payroll probably accounts for 50% or more of your total expenses.

Other categories would be:

  • Regular monthly expenses (rent, telephone, computer leases, etc.)
  • Special expenditures required to produce revenue
  • Payments on overdue accounts
  • Other

A wise banker (an oxymoron?) once told me that you’ve got to pay your people – they’ve got to eat, and they have mortgages to pay. You have to give payroll priority.

Part of the objective here is to figure out which items you can pay late. Credit card and lease payments you want to make on time for the most part, because they charge stiff late fees, and they are more likely to affect your credit report sooner rather than later.

But yes, you can get away with skipping a credit card payment. And you can be sure your leasing company doesn’t want to take back that obsolete equipment, so they will work with you.

Rent you can sometimes get away with paying late, but you have to be careful not to trigger eviction. I had one landlord I had trained to expect payment at the end of the month instead of at the beginning. I made a point to pay it sooner if I had the money, and to never go over 30 days (except maybe once or twice). I also returned all their calls promptly when they called for payment. Periodically I had to break in a new collections clerk, but they gradually learned that I was slow, not a deadbeat.

A generation ago the conventional wisdom was that you had to pay your phone bill before anything else. But with long distance being so competitive nowadays, you have a bit more wiggle room. Most of them have terrible billing systems anyway. So you should be able to slide a little bit if you need to. And they do you give notice before they cut you off. Same with the local phone service.

You may have some subcontractors and others who can expect to share in your success when you do well. These can also be reasonably expected to share some of the risk and wait for their money when things are not going so well.

Here’s what the initial list might look like in Excel:

Detailed Cash Projection  
     
Payments  
     
Date Due Description Amount
     
Payroll and withholding taxes  
1/10/2002 Payroll 2200
1/15/2002 Payroll taxes for December 2200
1/22/2002 Payroll 3000
1/20/2002 State tax withholding for December 600
     
2/10/2002 Payroll 2200
2/15/2002 Payroll taxes for January 2300
2/22/2002 Payroll 3000
2/20/2002 State tax withholding for January 450
     
3/10/2002 Payroll 2200
3/15/2002 Payroll taxes for February 2300
3/22/2002 Payroll 3000
3/20/2002 State tax withholding for February 450
     
4/10/2002 Payroll 2200
4/15/2002 Payroll taxes for March 2300
4/22/2002 Payroll 3000
4/20/2002 State tax withholding for March 450
     
Leftover from previous month  
1/5/2002 Verizon 310.65
1/5/2002 Cellular 84.74
1/5/2002 Dell Financial 171.78
1/5/2002 AT&T Financial 354
1/6/2002 Lucent 29.57
1/5/2002 Sprint 75.23
1/5/2002 Qwest 130.47
     
Regular Monthly Expenses  
1/22/2002 Rivulet IT Group 5000
1/8/2002 Crestar bank card – Travel 1000
1/28/2002 Outrageous phone system lease 354.76
1/11/2002 Staples 100
1/14/2002 FU Bank Visa 350
1/15/2002 Office rent 1092
1/15/2002 Dell Financial Services 169.48
1/7/2002 Dell Financial Services 225
1/18/2002 AT&T Capital – Computer lease 224.19
1/11/2002 Acme Long distance 178.93
1/18/2002 Verizon – local phone service 218.6
1/22/2002 US Bancorp Visa 250
1/22/2002 Blue Cross 790
1/28/2002 Sanwa Computer Lease 267.23
1/28/2002 Contingency 1500
     
2/8/2002 Rivulet IT Group 5000
2/8/2002 Crestar bank card – Travel 1000
2/28/2002 Outrageous phone system lease 354.76
2/11/2002 Staples 100
2/14/2002 FU Bank Visa 350
2/15/2002 Girlland and Associates 1000
2/15/2002 Office rent 1092
2/13/2002 Dell Financial Services 169.48
2/7/2002 Dell Financial Services 225
2/18/2002 Acme Long distance 200
2/18/2002 Verizon – local phone service 300
2/22/2002 US Bancorp Visa 250
2/22/2002 Blue Cross 720
2/28/2002 Sanwa Computer Lease 267.23
2/28/2002 Contingency 1500
     
3/8/2002 Rivulet IT Group 5000
3/8/2002 Crestar bank card – Travel 1000
3/28/2002 Outrageous phone system lease 354.76
3/13/2002 Staples 100
3/14/2002 FU Bank Visa 350
3/15/2002 Office rent 1092
3/15/2002 Dell Financial Services 169.48
3/7/2002 Dell Financial Services 225
3/18/2002 Acme Long distance 200
3/18/2002 Verizon – local phone service 300
3/21/2002 L&A 75
3/22/2002 US Bancorp Visa 250
3/22/2002 Blue Cross 720
3/28/2002 Sanwa Computer Lease 267.23
3/28/2002 Contingency 1500
     
Special Expenditures to produce revenue  
1/11/2002 Printing and mailing 542.98
     
Long term catch up  
2/28/2002 Nelson Reed 500
3/30/2002 Nelson Reed 500
4/30/2002 Nelson Reed 285
     
2/18/2002 JPJ 100
3/18/2002 JPJ 100
4/18/2002 JPJ 100
     
1/25/2002 IRS 1000
2/25/2002 IRS 1000
3/25/2002 IRS 1000
4/25/2002 IRS 6000
     
2/28/2002 Howie 500
3/30/2002 Howie 500
4/30/2002 Howie 500

Note the use of “contingency” as a payment due. Trust me – when you make a list of payments due, that will be the minimum. There will always be things that come up that are important. And if nothing comes up – it becomes cushion.

Also, note that the real work in coming up with the list of payments due is in doing the first month. After that you can copy and paste and change the dates.
So you make your list of payments due, and total them by week. You can do this in Excel by sorting the worksheet based on column A.

First copy the entire three columns to a new worksheet in the same workbook (i.e. a new tab). Sort this data in the second tab by marking all three columns, and then pick Data / Sort. Click “Header Row”, and then click OK.

You’ll get something like this:

Detailed Cash Projection  
1/5/2002 Verizon 310.65
1/5/2002 Cellular 84.74
1/5/2002 Dell Financial 171.78
1/5/2002 AT&T Financial 354
1/5/2002 Sprint 75.23
1/5/2002 Qwest 130.47
1/6/2002 Lucent 29.57
1/7/2002 Dell Financial Services 225
1/8/2002 Crestar bank card – Travel 1000
1/10/2002 Payroll 2200
1/11/2002 Staples 100
1/11/2002 Acme Long distance 178.93
1/11/2002 Printing and mailing 542.98
1/14/2002 FU Bank Visa 350
1/15/2002 Payroll taxes for December 2200
1/15/2002 Office rent 1092
1/15/2002 Dell Financial Services 169.48
1/18/2002 AT&T Capital – Computer lease 224.19
1/18/2002 Verizon – local phone service 218.6
1/20/2002 State tax withholding for December 600
1/22/2002 Payroll 3000
1/22/2002 Rivulet IT Group 5000
1/22/2002 US Bancorp Visa 250
1/22/2002 Blue Cross 790
1/25/2002 IRS 1000
1/28/2002 Outrageous phone system lease 354.76
1/28/2002 Sanwa Computer Lease 267.23
1/28/2002 Contingency 1500
2/7/2002 Dell Financial Services 225
2/8/2002 Rivulet IT Group 5000
  Etc.  

Then create formulas to sum up the payments by week. This is a pain to do by hand – but a necessary step. There might be some elegant way to do it in Excel, but I don’t know what it is. This is part of what SurvivalWare will do for you automatically. In Excel, you want to end up with something like this:

Beginning Cash: $1,000.00  
     
    Cumulative
Week ending Amount needed amount needed
1/11/2002 $5,403.35 $4,403.35
1/18/2002 $4,254.27 $8,657.62
1/25/2002 $10,640.00 $19,297.62
2/1/2002 $2,121.99 $21,419.61
2/8/2002 $6,225.00 $27,644.61
2/15/2002 $7,211.48 $34,856.09
2/22/2002 $5,020.00 $39,876.09
3/1/2002 $4,121.99 $43,998.08
3/8/2002 $6,225.00 $50,223.08
3/15/2002 $6,211.48 $56,434.56
3/22/2002 $5,095.00 $61,529.56
3/29/2002 $3,121.99 $64,651.55
4/5/2002 $1,000.00 $65,651.55

In this case, we need $4,403 by the end of the first week, taking into account the $1,000 we already have in the bank. By the end of 13 weeks, we’ll need a total of $65,652 in addition to the money already in the bank. A quick sanity check is to divide this number by three – and ask yourself if that is the approximate amount of your monthly expenses. Of course, there may be some “catch-up” payments embedded in there – which would make the total higher than your normal expenses.

So now what?

What you have to do is come up with a combination of delayed payments, accelerated collections, and / or new borrowings/investment to reduce the peak shortfall to 0.

Delayed payments

Anything you can slide a week or two, do so. If you are drawing a paycheck, you will be at the top of the list of people being paid late. After making date changes and/or splitting payments in the Excel file, you have to re-sort the payments, and re-compute the sum for each week.

Accelerated collections

There is an art to asking customers for money while seeming like you don’t really need it. “Hey look Joe, my bookkeeper asked me to give you a call – apparently we have no record of receiving that last payment. Can you double check to make sure it didn’t fall through the cracks?”

Or “Hey Joe – we’ve got a big tax payment coming due – any way of expediting payment on the latest invoice?”

Depending on how friendly you are with your customers, you can even impose on them once in a while. “Hey Rich, any way you could Federal Express the payment if I fax you the January invoice?”  But you only want to do this when you really, really need to. The purpose of the detailed cash planning is to know when you really, really need to.

Invoicing fundamentals

Invoicing is like voting in a Chicago election – do it early and often.

It is so easy to procrastinate on the administrative side of the house – but this is one area where you have to avoid procrastinating. It doesn’t matter when the invoice says payment is due – the invoice is not going to get paid before it is sent out. Think of it this way: if you consistently send out invoices a week late, you are delaying receipts by a week. If you average $7,000 a week in receipts, the net effect is that you have $7,000 less to work with. If you take 10 days to send out the invoices, it’s the same as if you need another $10,000 in working capital to run your business.

Offering discounts can speed collections, but make sure you do the math and understand how much it is costing you. Some large companies have policies in place that require the payables department to speed payments to earn discounts – e.g. 2% for paying within 10 days. Many years ago we offered a 5% discount for payment in 10 days – which did speed collections, but also gave out the signal that we were desperate for cash (we were!).

Also, keep in mind that some companies will take the discount regardless of whether they meet your payment terms – so make sure you monitor the impact if you do offer early payment discounts.

If you are billing customers for time – consider going to twice a month billing. I know of a company that provides programming services and bills it customers promptly the 1st and 15th of each month. My hat is off to the entrepreneur who runs it.

New borrowings / investment

Remember what they say about banks: they will lend you money only if you can prove beyond a shadow of doubt that you don’t need it. My experience is consistent with this saying.

Outside investors will sense your plight and demand onerous terms – usually involving control of the company and perhaps your firstborn. Some will add a clause taking your firstborn from your current marriage and all future marriages. Venture capitalists are known as vulture capitalists for a reason.

The best time to arrange to borrow or for someone to invest is when there is not the tremendous time pressure associated with a cash crisis. I know – easier said than done.

This is a time to turn to friends and family, and/or to get creative. Key customers might be able to help as well – maybe not with a formal investment – but perhaps advancing money to undertake a new project, or pre-paying for products in anticipation of future demand.

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2 Responses

  1. […] is an expansion of the example mentioned in the article “Surviving a Cash Crisis – Fundamentals” (a must read if you are experiencing cash flow problems right […]

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