A cash crisis can hit any business, so CFOs need to know how to bring it under control and create stability. Here, expert Jeremy Fletcher, CEO and Founder of Transform Finance, explains what to do in the five days after a cash crisis to turn the business around.
Article by Shereen Ali | Deputy Editor Financial Director – June 6, 2017
What have been the biggest challenges for your business over the past year, and what role did finance play in addressing them?
Controlling and maximising cash is a major element in creating stability and success in any organisation. A cash crisis usually manifests as an inability to pay creditors or meet other financial obligations.
This failure may be because of issues including lack of profitability, inadequate funding, poor debtor control or an inflated cost-base. In a well-managed business, a cash crisis is normally predictable, but a disorganised business that is unable to produce accurate operational forecasts may be taken by surprise.
By showing decisive leadership and taking the steps below, CFOs can bring income and expenditure under control and create the foundation for turning the business around within five days.
CFOs may also want to consider the introduction of external experts, such as general process owners, turnaround consultants and funding advisers.
- Assess the cash position through the creation of a cash flow forecast that details daily income and expenditure, plus a weekly outlook for the next three months. From this, CFOs will immediately be able to spot danger points by identifying key outgoings such as payroll, bank debts, loan repayments, taxes, and payables.
- Place an immediate block on all outgoing payments and all new purchases, including capital expenditure, unless directly approved by the CFO. Now CFOs can control outgoings and prioritise essential payments against the flow of incoming cash.
- Implement an immediate headcount freeze, as headcount and related cost usually accounts for approximately 70% of the total overhead of the business. Taking firm control on this area will not only give immediate cash savings, but may help avoid unnecessary redundancy costs later.
- A more detailed analysis of the peaks and troughs of the cash flow is now required, and will enable CFOs to better plan the short-term financing of the business. Consideration will need to be given to extending and increasing overdraft facilities, analysing current loan facilities and reviewing options for new finance including; changing bank; introducing new lenders, investors and shareholders.
- Take direct control of the credit control function and ensure the creation of a daily list of top debtors to be called each and every morning as the opening job of the day. This is the time to start the assessment of the credit control function, from management and team to systems and processes. Start considering the value of bringing-in an expert GPO to bring greater efficiency to this key function.
- Review opportunities to push-out supplier payments and consider negotiating a new payment plan with key suppliers. In general, suppliers will be supportive as they want to continue trading and are often comfortable with helping clients through difficult times. However, always make payroll, and make it on time, this is not negotiable.
- It’s time to win the backing of the board with a full presentation outlining the immediate situation, the short-term outlook, the CFO’s plan of attack, and a summary of the decisions that the board needs to make to support the plan.
- Under the CFO’s guidance, the board will need to agree on how best to consolidate and streamline the business, but also balance this by identifying areas for revenue growth and the requirements for appropriate investment.
- New financing will also need to be discussed and agreed, resulting in a clear plan between short-time financing options, new banking arrangements and further funding from equity.
- The agreed approach to cost-cutting now needs to be implemented, and the CFO should be leading on this exercise, working on the detail with HR and the executive team.
- In terms of credit control, the CFO will need to create a bow wave of change across the organisationensuring that all individuals who touch the customers have a responsibility in supporting collection of debt. Account Managers must connect with their client contacts to resolve payment issues; support engineers must resolve technical issues with urgency; senior management must engage with their customer peer group.
- A good day to further analyse planned capital spend and major projects: cancel the plans that don’t give clear and fast financial return; find funding for the plans and projects that bring direct and immediate benefit to the business.
- Final cross-company communications need to be released explaining the company’s new priorities and initiatives. This can be led by the CFO working in tandem with the CEO and HR Director, but with the full support of the executive team.
- Time for the CFO to finalise thoughts and plans for new investment: further discussions with banks and other potential investors should now be leading CFOs to a short-list of contenders, including emergency short-term funders, to longer term investment partnerships.
- Finish the week with a few simple and effective tricks:
- Create a list of monthly mobile phone expenditure by employee – each month let the top 20 spenders know their expenditure – their phone use will drop immediately.
- Randomly review a few T&E claims and send a few minor queries to the relevant employees – word will fly around the company, and everyone will start adhering to the expense policy.
- Consider only allowing flights and hotel expenditure that has your approval, thus ensuring that everyone will re-think the necessity of their trip.
With five days of considered preparation completed, the CFO is now perfectly poised to drive the following: improvement in cash collections; re-financing of the business; controlled release of payments and supporting new investments as cash allows.
Over the coming weeks, the plan to reduce the company’s cost-base can now be materialised in a controlled and measured way, and the sales and marketing arms of the organisation should be re-focussing on identified profitable growth areas.
Jeremy Fletcher is CEO and Founder of consultancy firm, Transform Finance.