Advanced CFO - How to see and survive a cash crisis

4. 3 Reasons to Manage Cash 1. Early warning system 2. Identify problems with customers 3. Ensure payment of suppliers and employees 4. Comply with lender requirements 5. Control the way cash is expended

5. 4 How to Manage Cash 1.Take control of cash 2.Create a cash reserve 3.Forecast cash

6. Week 1 Week 2 Week 3 Week 4 >>>> Week 13 TOTAL Receipts Cash Sales -$ Collection of AR (invoiced) - Not Yet Invoiced Collections - Other Receipts --$ TOTAL Receipts -$ -$ -$ -$ >>>>> -$ -$ Disbursements Payroll / Taxes -$ Rent - Trade Payables (bills received) - Estimated Expenses (No Invoice Yet) - Loan Repayment - Total Cash Outflow (non-payroll) -$ -$ -$ -$ >>>>> -$ -$ Operating Cash Flow -$ Beginning Cash Balance $100.0 Change in Operating Cash Flow - Total Ending Cash Balance $100.0 +/- $Z $X,XXX.X - $Y,YYY.Y = $Z,ZZZ.Z $Z,ZZZ.Z $100.0 $100.0 +/- $Z (000's) $Y,YYY.Y $X,XXX.X

7. 6 Key Principle “Never disburse more in a week than cash in the bank at the end of the previous week”

8. Forecast Actuals Week 2 Week 2 Variance B/(P) Comments Receipts Cash Sales 62.0$ 58.0$ (4.0)$ Rain slowed foot traffic Collection of AR (invoiced) 11.8 10.0 (1.8) Tom James did not pay Not Yet Invoiced Collections 5.0 5.0 Pre-payment for large order Other Receipts 28.0 28.0 Sold consigned goods-$ TOTAL Receipts 73.8$ 101.0$ 27.2$ Disbursements Payroll / Taxes (95.0)$ (100.0)$ (5.0)$ Overtime > Forecast Rent (75.0) (75.0) Paid one week early - timing issue. Trade Payables (bills received) (12.0) (9.4) 2.6 Timing issue. Estimated Expenses (No Invoice Yet) - (4.7) (4.7) Unexpected ceiling repair Loan Repayment (10.6) - 10.6 Timing issue - will pay next week.-$ Total Cash Outflow (non-payroll) (117.6)$ (189.2)$ (71.5)$ Operating Cash Flow (43.8)$ (88.2)$ (44.3)$ Beginning Cash Balance 183.0$ 183.0$ Change in Operating Cash Flow (43.8) (88.2) Total Ending Cash Balance 139.2$ 94.8$ (44.3)$

9. Week 1 Week 2 Week 3 Week 4 >>>> Week 13 TOTAL Receipts Cash Sales 68.0$ 62.0$ 60.0$ 60.0$ >>>>> 71.0$ 321.0$ Collection of AR (invoiced) 30.0 11.8 10.0 - >>>>> 51.8 Not Yet Invoiced Collections 5.0 10.0 >>>>> 29.0 44.0 Other Receipts 28.0 >>>>> 28.0-$ TOTAL Receipts 98.0$ 73.8$ 103.0$ 70.0$ >>>>> 100.0$ 444.8$ Disbursements Payroll / Taxes -$ (95.0)$ -$ (95.0)$ >>>>> (35.0)$ (225.0)$ Rent (75.0) >>>>> (75.0) (150.0) Trade Payables (bills received) (15.0) (12.0) (9.4) (2.4) >>>>> - (38.8) Estimated Expenses (No Invoice Yet) - - (4.7) (23.6) >>>>> (40.0) (68.3) Loan Repayment - (10.6) - - >>>>> (11.0) (21.6) Total Cash Outflow (non-payroll) (15.0)$ (117.6)$ (89.2)$ (121.0)$ >>>>> (161.0)$ (503.7)$ Operating Cash Flow 83.0$ (43.8)$ 13.8$ (51.0)$ >>>>> (61.0)$ (58.9)$ Beginning Cash Balance 100.0$ 183.0$ 139.2$ 153.0$ >>>>> 102.1$ 100.0$ Change in Operating Cash Flow 83.0 (43.8) 13.8 (51.0) (61.0) (58.9) Total Ending Cash Balance 183.0$ 139.2$ 153.0$ 102.1$ >>>>> 41.1$ 41.1$ (000's)

10. Maintaining a positive bank account balance Making Payroll Two Two Points of Emphasis

11. Two How to Survive a Cash Crisis 1. Take control of cash 2. Identify hidden cash 3. Find expense savings 4. Restructure trade payables 5. Rid organization of deadwood 6. Collect money from customers

12. Two How to Survive a Cash Crisis 7. Factor receivables 8. Sell unproductive assets 9. Restructure long-term agreements 10. Restructure bank debt 11. Consider sale leasebacks 12. Explore other sources of financing 13. Hire professional help

13. 12 Cash Management Learnings Why How Help!

14. Thank you for attending today For a copy of the presentation, send an email to info@advancedcfo.com with “Webinar – Cash Management” in the subject line Presenter: Matt McKinlay Partner, Advanced CFO

Editor's Notes

Thank you and welcome. Move Quickly, Respect time Fundamentals and time for Q&A
Today we’ll discuss: 1. Why cash and cash management are so important? 2. How to control and better manage cash. 3. Uh oh! I’m in a cash crunch now! How do I survive?
Cash is the lifeblood of any business. Your business might be large or small, growing or declining, a for profit or not-for profit, regardless, you need cash to survive. Poor cash management practices are the number one reason businesses fail. Unfortunately most business owners tend to focus on revenue, profits, expenses, customers, employees, and various other operating metrics, and leave cash to chance. To them, the customer is king. Or net profit is king. Or revenue, and so forth. While these are all important, they do little to protect the lifeblood of the business. For any company to survive, cash flow is the single most important financial factor. A company can have fantastic revenue, reasonable expenses, and significant income, but if its cash management practices are not effective, it could still have negative cash flow. And without positive cash flow, any company, no matter how promising the business model, will go bankrupt. In fact, I was once engaged by a business with a balance sheet that showed a net worth of several million dollars, but it ran out of cash and was forced into a chapter 11 by its creditors. Here's another particularly dangerous scenario that is far too common: ABC Enterprises has been up and running for a few years and starts allowing longer terms of repayment to its customers. It decides (and rightfully so) that it can generate more sales with more flexible repayment terms. Sure enough, sales surge and most customers are using flexible repayment terms. At the same time ABC Enterprises is also purchasing more inventory, diversifying the type and increasing the quantity to sustain sales. How does the income statement look? Sales look good, net profit looks good, the numbers are increasing period over period so initiatives appear successful. The balance sheet also appears to be doing great, lots of current assets (in the form of AR's and inventory) minus whatever debts are being incurred to sustain the operation. But here's the problem, if AR's and inventory are expanding period over period, this all comes at the expense of cash. Add to inventory becoming obsolete and trouble collecting (likely to have more bad debt in this scenario) and you have a recipe for disaster that could fly under the radar if looking at the balance sheet, income statement, and key metrics alone. In another instance, consider a business that’s been declining for several periods, and the owner hasn’t been able to trim expenses. Over time, sales can’t keep pace with the company’s expense structure, and the company falls behind with it’s trade vendors, landlord or worse, employees. A sure way to close the doors on the business is to miss a payroll, or bounce payroll checks! In all these instances, better cash management practices would help these businesses survive and succeed.
So why should a business owner manage cash? There are at least five reasons: To create an early warning system. A business owner that can predict that a cash shortfall is coming has many more options to address it than a business owner that gets surprised by a cash crunch. I’ve had this call before: “Payroll is due Friday and I don’t have the cash to cover it. Can you help!?” To identify problems with customers. Managing cash can help a business owner learn which customers are paying their debts timely and which are not. To ensure the business can pay suppliers and employees. Suppliers who don’t get paid will soon stop supplying the business. Worse, employees that don’t get paid will stop showing up for work! To comply with requirements by lenders. Many lenders require borrowers to provide cash flow reports, to ensure the business is liquid. To control the way cash is expended. Many business owners that begin managing cash better are surprised by the number of ways cash can leave the business. For instance, some business owners are surprised by the amount of travel and entertainment expenses made by employees through company-issued credit cards. Cash forecasts alert the business owner to the number of ways cash is expended and can help him or her better manage them. We’ve discussed why cash is king, and why it’s important to manage cash. Now let’s talk about how.
With an understanding of why forecasting cash is so important, let’s consider how to do it To better manage cash, business owners need to take three steps: Take control of cash Evaluate the ways cash can leave the business (ie DBSI 400 employees with 150 credit cards). Who are the check signatories, who is authorized to cut purchase orders, etc., who has wiring capabilities. CEO or CFO approves all spending and hiring decisions Approve spending that adds value to the business Create a reserve Just like you’d set aside a rainy day fund for your household, your business should also have a cash reserve. The amount and type of reserves depend on a number of factors including expense run-rates, sensitivity of the business to seasonal changes or economic changes, the stage of your business, growth opportunities, other sources of liquidity that will be readily available and so forth. An expert can help you determine the right amount, but generally, it’s recommended healthy businesses keep three to six months of operating expenses in reserve. Ie - I have a friend that’s a car dealer. Escalades trading in for $60k and purchasing a $20k note. Implement and manage a cash forecast The one we’re going to spend the most time on – forecasting cash. We’ll even get pretty tactical. Not extensive or overly complex. In fact, Kitchen table budgeting
Cash Forecast I suggest companies forecast cash weekly, at least initially. Stable and non-seasonal companies can get by with a monthly forecast after they get in the rhythm. For measuring short-term liquidity, which answers the question, do I have enough cash to pay bills that are currently due, the standard practice is to forecast cash 13 weeks - 90 days or one quarter. While we will focus here on a cash forecast over 13 weeks to measure the company’s liquidity, your business should also include a longer term cash forecast in it’s long-term budgeting cycle, to anticipate longer-term cash needs. The main sections of the cash forecast includes a section for anticipated cash receipts by week (shown in green), a section for disbursements (shown in yellow), and a section for liquidity in blue. The process for creating the forecast is as follows. First, plug in the current bank account balances (or line availability if you use a line of credit). Then, work with your Accounts Receivables Collections team to forecast what collections will be received each week. Work with your payables team to determine what invoices will be paid, and when. Your payroll clerk (which might be the same person) should project payroll and payroll tax expense. Add any additional receipts or disbursements you’re aware of like one-time items, special purchases and so forth. The difference between your receipts ($X) and disbursements ($Y) is operating cash flow ($Z). This will be computed on a weekly basis. Add or subtract the weekly operating cash flow from the beginning cash balance (or, if operating under a line of credit, line availability) to compute the ending cash balance (or ending line availability). The previous week’s ending balance becomes the next week’s beginning balance and rolls forward. This is the framework, and with the right information can be completed in 30 minutes each week.
Key Principle: Never spend more in a week than you have cash available at the end of the previous week. Simply stated, find out your bank balance on Monday, and don’t make disbursements that exceed that balance, even if you think you can rely on the collections to come in. Obvious, I know. But you’d be surprised by the number of business owners that write checks based on the collections that are promised to come. Following this principle will help you avoid a serious crisis when a customer doesn’t pay when they say they will. Sometimes with my clients, I list disbursements at the top of the cash forecast, and receipts at the bottom to help keep this principle front and center.
The most important part of the cash forecast is to compare actual performance with budgeted performance. MUST DO ITEM! Almost always forget Fcst loses its power unless weekly learning built in. Looks the same as your weekly fcst, just compares: What did I say would happen last week What actually happened last week Let’s assume this is a business that sells building materials to contractors on credit and to retail customers for cash. In this instance, this company’s operating cash flow was $44.3k poorer than projected. At a glance, this is due to paying rent a week early, which is partially offset by an unexpected sale of consigned goods. Digging deeper there’s more to the story. Comparing actuals against forecast provides valuable insights, and prompts the business owner for specific actions needing to be taken? More overtime than expected, despite slower foot traffic due to the rain (why?) Valuable learnings… Perhaps the unexpected ceiling repair made employees less efficient. Didn’t collect from customers the way I expected – chase harder
Cash Forecast Continuing the example with the building supply company. So what if your cash forecast looks like this? In the example, the business looks to be heading toward trouble. Over the 13 weeks, it consumes nearly $60k in operating cash, and has only $41k left in the bank. This is only about 1/3 of the monthly expense burn rate. Further, it had a one-time cash receipt of $28k in week 3 that probably won’t continue. In this example, the business owner knows it has at least four weeks before the crisis grows, and he/she has time to create a plan. So, what should the business owner do?
First, before discussing specific actions, it’s important to caution that as liquidity becomes scarce, there are two mistakes that, if made, can and will shut your business down: bouncing checks and missing payroll. For that reason, we’re always going to maintain a positive bank account balance (we’re not going to write checks for funds that aren’t available); and make payroll. These items are almost always our first priority. With that note of caution, here are some steps the business owner can take to avert a crisis.
Unfortunately, there’s no magic bullet to survive a cash crisis – takes focus and very tough decision-making. Some people might see actions that need to be taken, but aren’t able to take them because it affects friends or family members. There are 13 action items I coach business owners to take that are listed on this and the next page. While this is not an exhaustive list, and any company might not take all actions, these actions will provide both short term cash to survive an immediate crisis, and long-term cash to sustain the business until operational changes can be made. When I’m consulting a client with cash constraints, I make the first three points mandatory, so we’ll discuss them in greater detail. Take control of cash. In fact, apply a tight tourniquet on the business. CEO / CFO becomes sole signatory, all hiring freezes, all PO’s approved by owner. I want to make it very hard for the organization to spend money. Identify hidden cash. Every company I’ve worked with has some – ie, United Pipe with $25k legal retainer; Franson $5,000 utility deposit, RAR security deposit held by a state labor board to secure a workers comp policy. Find expense savings. Look for discretionary expenses, like advertising, overtime, trade shows, subscriptions, etc. Work with key suppliers to restructure trade payables. Farm client willing to restructure $4.3M in trade debt to long-term. Rid organization of deadwood – poor performing employees, or employees with poor attitudes Collect money from customers. You want to get real aggressive. Offer better terms to entice immediate payment. CEO can help.
7. Factor receivables - Somewhat expensive, but can be underwritten within a couple weeks and provides immediate cash 8. Sell unproductive assets - Weekend car, manufacturer with stale inventory, farm equipment (7500 acres reduced to 3200).. 9 – 11 – Hire a professional – attorney, restructuring advisor 12 – Explore other sources of financing - Customers, suppliers, strategic partners, friends and family 13 – Hire a good professional – various traps when a company cannot pay its obligations when they become due. The right professional can save you from these traps. While this is a high-level overview
So that’s it. You’ve learned: Why cash and cash management is so important How to control and better manage cash, and you’ve seen a cash forecast template that can help What help and actions can be taken to survive a cash crisis
Thank you again for your participation today, and I hope you’ve found today’s webinar useful. For more information, please visit our website, or send an email to info@advancedcfo.com with “Webinar – Cash Management” in the subject line. Feel free to also contact me directly at mmckinlay@advancedcfo.com. Dave, back to you.

Advanced CFO - How to see and survive a cash crisis

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Editor's Notes