RESILIENCE: CASH

Financial resilience underpins business resilience.

That’s why having a handle on your business’s cash is vital. In a challenging environment, the crises often keep coming, but the cash does not. And it’s impossible to grow without cashflow.

While the news looks good for greater spending within our borders and stay-at-home tourism set to boom, this comes against the backdrop of a generally contracting economy and an expected decline in sales. In a tough economic environment, it’s harder to get people to buy and there’s evidence that subdued customer spending is set to continue. Kiwis are looking more closely at where their dollars are going, and questioning whether that money is serving Aotearoa New Zealand.

Opportunities will be found by those that seek them. We have always needed to be planning for new horizons and re-imagining our businesses; now the pace has changed. Looking for opportunities to work towards a better New Zealand demands – and depends on – resilience, and especially the cash reserves needed for resilience. A drop in revenue puts a business’s cash position and liquidity at risk – especially those that have high fixed costs.

However, resilient businesses have the potential to be high-performing, they are able to go beyond business as usual and achieve something truly exceptional. And they’re what we need for a better, stronger New Zealand. As we continue exploring the six pillars of business resilience, you can download our framework and rate your own business as part of our full report here.

Operating cash cover

The important question – always – is whether you have more coming in or going out over the next 90 days. And obviously, if you have negative cash burn, this needs immediate attention and action. Work out your operating cash cover – how much cash do you need to run your daily operations?

Once you know this, you can determine cash burn – the rate at which you use up your cash reserves. This is important for determining how much cover your current cash reserves give you, and what you need to aim for to build a more resilient position.

Effective cost cutting

The worst thing a business can do is take cost cutting measures in a panic, or as a knee jerk reaction. Any cost cutting measures should be planned, thought through and sometimes delayed until the need to act is triggered by the contingency plans you are prepared for. For cost cuts to be effective, they can’t be purely reactive.

We’ve looked already back in the strategy + execution pillar about the case of business hypothermia. In a challenging economic environment, we need to reassess the engine room – or cash-generating activities of a business – and make sometimes tough calls about aspects of your operations that need to go in order to manage costs. Your primary source of cash is your customer, and every dollar should be employed to keep your business trading.

Be discerning, but also mindful not to make too many cuts or strip too much of the value out of your business; you will leave customers with nothing to pay for. Keep a sustainable mindset. Being effective means taking actions to build resilience now, without killing your business in the mid-term.

Debtor management

Chances are that a significant proportion of your cash is tied up in your operating cycle until you make sales and collect that revenue from your customers. Only at that point is it able to flow back into your business. Cash cycles of 90 – 120 days within a business are not unusual, so it’s easy to think that a day more or less doesn’t really make a lot of difference, where – in fact – it does.

As well as optimising stock levels and purchasing raw materials at the right time, the more actively you manage this process with debtors – by improving your time to collect outstanding debt or renegotiating payment terms – the stronger, or more resilient, your cash position will be. It all adds up and frees up cash that is tied up in your business for investment – whether to build up your extra cash buffer (ideally three months of operating expenses), reduce business debt, or fund future growth.

Credit lines

While it’s ideal to explore opportunities to be less dependent on bank loans generally, it is also worth understanding your position with the bank in challenging economic times. If you think you might need support, front-foot this early. Speak to them proactively about improving your available overdraft facilities, or apply for a loan that you may or may not need to draw on later.

Ideally, the more equity you have on your balance sheet, the higher your security buffer. Another option to avoid taking on more debt is to sell off excess or underperforming assets – be they property or machinery. However, be mindful about losing too much of the value from your business, as mentioned.

Shareholder funding

Another way to shore up equity is to reach out to existing shareholders for additional cash or shareholder loans. Some of your shareholders might be looking for additional opportunities right now, and while you may not get the highest valuation at the current time, strategic investors can help you strengthen your foundations. In a bid to acknowledge that we are all in this together, it might be important to cut dividends to increase resilience in the short-term.

Daily reporting

If you’re in the fight, it’s important to manage your business’s daily progress with KPIs and to monitor your reports with more frequency than you once might have. We’ve talked about this being the time for an increased cadence and we would advocate for daily, or at the most, weekly reporting on your most relevant financial indicators. As a minimum, look to keep a close handle on your:

  • Cash burn
  • Recurring revenue
  • Outstanding invoices
  • Sales pipeline

Resilience is the ability to weather uncertainty

It relies on building strong foundations and remaining agile. It’s founded in the determination to keep trying new things and doing whatever it takes.

Our operational realities – and the world as we know it – have changed. And when we come to the edge of all that we know, we have only one choice: stand our ground or build something better.

If you’re ready to move forward with certainty, head over to our website and download the latest Advisory.Works report Building Resilient Businesses for a Better New Zealand.

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Topics: Blog, Financial Strategy