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cash crisis

The first rule of a cash crisis is: Never wait!

Just like facing down an opponent in the movie Fight Club, facing up to a cash crisis will cause a rush of adrenaline, make your fears rise, and your heart beat quickly.

And just like in Fight Club, there are rules that apply. Here, they apply to cash flow.

The first rule of managing cash flow in a crisis is: Don’t wait.

The second rule of managing cash flow in a crisis is: Don’t be indecisive (do NOT wait).

The third rule of managing cash flow is: If you make a crappy decision, you’ll bleed out and your fight is over.

Developing strategies take time – you don’t have time in a cash crisis!

It may be the case that the COVID-19 crisis has been short-lived in Australia. But the untold truth is that the impact of this crisis will ripple out for much, much longer. The figures for March, April and May show a sharp drop in the number of companies entering insolvency (external administration). This is despite the economy going through its most difficult period since the Great Depression.

Many companies are simply ‘propped up’ by the Government stimulus packages – when September 2020 comes, there is expected to be an avalanche of insolvencies. This is the calm before the storm…

This is why you need to go on the offence – prepare, plan, act. 

Strategic thinking, and strategic action, is deep, difficult, and time-consuming. Tactics, on the other hand, are fast and smart.

You wouldn’t decide to change your strategy in the middle of a fight—such as, deciding to use weapons that you couldn’t possibly access right now. But you would change your tactics. If you spot that your opponent is partial to an uppercut-cross combination, you may decide to stand back and kick them instead.

The same ruthless rules apply in business. Competition is about to get tough and your opponent is the unknown and uncertainty.

It’s better to focus on immediate tactics that release or generate cash, or that preserve your cash position.

12 Tactics that you can use to improve cashflow to avoid a cash crisis

There are a number of key tactics that you can use to improve your cashflow.

Here are just a handful:

  1. Contact us now and implement the insolvency safe harbour (s588GA, effective 2017) PRIOR to September. This protects directors from insolvent trading personal liability for debts incurred directly or indirectly with a course of action that leads to a better outcome.
  2. Focus on your existing customers
  3. Control your pricing, volume, and customer interaction
  4. Introduce loyalty programs, or new ways of communicating with clients, that add value to them
  5. Consider bundling your products or services in a way that delivers more value to the client and improves your service efficiencies at the same time
  6. Study how much it costs you to serve your clients, such as after-sales support and servicing
  7. Segment your clients into those you want to keep (because they’re profitable); those you can improve (who are potentially profitable) and those you’d rather leave behind (they’ll never be profitable). Letting your unprofitable customers go will reduce your service overheads.
  8. Watch your accounts receivable like a hawk, and be unrelenting about chasing outstanding payments
  9. Review (and, if necessary, update) your debtor processes. Do you hold onto work if they don’t pay? Can you offer discounts on early or upfront payments? What other levers might you have that you could pull to encourage payment?
  10. Vary your policies around order quantities, safe stock levels, lead times, or other components of your sales workflow so that you can move inventory more quickly
  11. Close or suspend unprofitable branches, offices, or units; or, put in place a new cost-sharing model, so that you aren’t paying out for no return
  12. Change your approach to staffing, whether that means not hiring, changing rosters, reducing headcount, asking people to take leave, or other measures. If you have to reduce your head-count, focus on back-end support staff rather than those who are right at the front-line of your service or sales.

There are many other tactics that you can use, which do not require changes to your strategy.

For example, you may choose to take advantage of the Federal Government’s new $250,000 unsecured loan guarantee, which may enable you to add more working capital.

Or, you may choose to sell old plant and lease new plant, which will reduce your maintenance overheads.

Whatever you do, the key is to be swift, decisive, and clear about why you’re doing it.

In summary

Cash is king, and you must know your numbers. A great many small and family enterprises aren’t 100% clear about their financial positions, or how to lift them. Don’t be one of those.

To avoid a cash crisis, your first and most important action is to protect and preserve your cashflow and your cash position. Everyone does this differently. Just make sure that you know what you’re doing and why you’re doing it.

And then, watch your financials like a hawk. Don’t ‘tap out‘ before speaking with us first – remember our confidential consultations are free.

Based in Adelaide, we specialise in business turnaround and restructuring and our reach is national.

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