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Just Live: Cash ‘Triage’ for Small to Mid-Sized Companies

by John Kogan

We recently wrote about what small and mid-sized companies should be doing right now in response to the COVID-19 shock. That was broad-based advice for any company leader. Now we want to dig a bit deeper into another question we’re getting from rightfully concerned business leaders and venture/PE investors, which is, “what can I be doing to clearly understand and effectively react to my short-term cash challenges?”

This is entirely in keeping with the “just live” ethos we presented in the previous article. If you want to thrive as a company, you must first make it through to the other side of this critical time.

Cash flow statements present “sources” and “uses” of cash, helping you understand where cash comes from and where it goes. But what do those words mean in a practical sense? Let’s examine both.

Sources of Cash

Sales, in most B2B industries, are only the starting point to cash. Cash comes from getting paid for what you sold.

If you get paid cash at the point of sale, then that’s your main “operating” cash resource. If you invoice your customers, then you are at their mercy until they pay you. Sometimes you wait months to get paid, and sometimes you don’t get paid at all. So, even if you count a sale as “revenue” because title has transferred from you to the buyer or your service has been performed, the cash represented by that sale becomes “accounts receivable” on your balance sheet while you wait for payment.

There are other non-sales/collection sources of cash. You may be in a business that collects periodic rents, or monthly/annual service payments (looking at you, SaaS businesses), or you may get cash from investors, banks, or other sources of equity and debt. Any cash you can collect today, from any source, is your priority.

A smart business knows every source of cash available to them and knows just how much they are expecting at any point in time. This is especially important in times like these, when even reliable companies may string you along on receivables. Know your sources and know your aging! Pro tip: write it all down and track it on an ongoing basis. This is too important to track casually.

Uses of Cash

There are typically far more uses of cash than there are sources. For product-producing companies, a major use of cash is parts and assemblies for their products, commonly known as cost of goods sold (COGS), or cost of sales (COS) if you’re not selling physical items. If you intend to build things or sell software or services, then you need to account for your COGS/COS.

Aside from the cost of your products and services themselves are the “operating and overhead” expenses directly related to running your company and selling your stuff. Frequently referred to as OPEX (operating expenses), these include things like salaries to employees, payments to contractors/consultants, marketing and selling expenses, and a wide variety of overheads such as rent, internet, phones, and much more.

Cash Triage

For a business, “triage” means figuring out and prioritizing one’s sources and uses of cash in such a way that the business can survive an uncertain present and perhaps thrive in an unknown future. Proper prioritization of both collection and spending can mean the difference between survival and bankruptcy.

Collections on Sales

Collections should be prioritized based on:

  • Amount Owed x Time to Cash Collection x Probability of Cash Collection

You should lay out all of your receivables on a spreadsheet in order of highest to lowest amounts, with estimates of payment time turned into a factor depending on how cash strapped you are (e.g., 1 to 7 days = 1.0, 8 to 14 days = .75, and so on, with longer times running to a factor of zero) and probability of collection in adjacent columns.

Then do the math. This simple exercise prioritizes where you should focus. The higher the number, the more you can count on it and prioritize its collection. Lower numbers still need attention, but you should prioritize based on expected total cash outcome for every line item.

If your company does direct sales, you should take a similar approach to your sales pipeline. Prioritize it not just on probability to close, but probability to pay and pay quickly. In fact, this may be a great time for quick pay discounts or simply discounting to get sales over the line. If you sell indirectly through a sales channel (e.g., through resellers or to distributors), get a quick sense from them of their stocking levels and how sales are going. These channels consolidate your selling, but they also consolidate your points of risk in a downturn. Lots of communication here will get you a better sense of how your products are doing in the channel and what shape you and even your resellers/distributors are in, which will directly impact your cash collections.

To the extent that you have immediate cash products ( e.g., online sales vs. offline), you will want to assess whether moving strongly toward those is possible. We’re seeing lots of companies move fast toward online, immediate (or near-immediate credit card) sales channels.

Non-Revenue Sources

With cash from sales sorted, you need to account for non-revenue-based sources. Do you have investors you can count on? Sometimes raising an “inside” round from known investors can be a quick way to increase liquidity. You may take a hit on valuation, and thus this inside round may be more costly than what you were hoping for down the road, but when survival is paramount, you should not get too tied up in valuation. If your alternative is hitting the wall, then it will seem like cheap money in the long run.

Do you have any bank debt/lines of credit available? Now is a great time to pull on your bank lines if you have any inkling that you’re going to need that cash. Even if you don’t think you will need access to those lines, call your banker — it’s smart to check in to energize the relationship, just in case.

There are also many SBA and specialty options that may fit your company, including some that are specific to certain industries, geographies or even location types (such as rural or inner city). You may be dubious that something out there would fit you, but it’s worth a few minutes looking or talking to your banker/expert.

As with that inside equity round, even if debt is not cheap, you need to consider whether it will make the difference and get you through this period. Remember that our definition of triage is prioritization for success. That extends to every financial decision.

Triage on Uses of Cash

COGS/COS is a place many don’t think to explore when it comes to prioritization, but not all products are created equal. You may not need to produce all your products. You need to consider every strategy for survival, including the seemingly perverse decision to not make some products for strategic reasons.

The supply chain is also a common place to work with vendors on payment terms. Your suppliers may be in tough times, as well, and you may benefit from favorable terms that in turn at least give them more future orders: a win-win. Regardless, know your supply chain, understand your leverage and mobility, and optimize for near-term cash to the extent practical.

Operating expenses are the expenses most think about when it comes to cutting costs, and the first area to consider is salary expense. Most companies have +/- 60% of OPEX in direct people costs. There are many ways to reduce people costs, and many of them don’t require letting staff go. But let’s get that one out of the way.

In a “nuclear winter” scenario, you need to look at who’s working on what. Our triage principle means that brutal prioritization is in order, and you need to look at prioritizing people who are closest to your collection of cash (e.g., production, marketing, sales, etc.). Those who are furthest from these areas or not impacting near-term events need to be considered more closely. Every position, from the top to the bottom, needs review.

However, not every people-related cost savings measure means a layoff. There are several alternatives, including furloughs, salary reductions (talk to your HR professional to determine what’s in bounds when it comes to salary reductions), salary deferrals (ditto), and equity in lieu of salary (talk to both HR and legal counsel on this one). I’ve seen founders and entire executive teams forgo or defer salaries, and for small and mid-sized businesses, that can have a tremendous positive cash impact.

Critical in each of these cases is having a strategy that goes beyond just the cuts. You will want to articulate what is cut, for how long, with what long-term impacts. Then you will want to build and execute a communications plan. Nothing reduces productivity like uncertainty. If you are particularly dependent on certain positions, you should know that and plan for them accordingly.

Other OPEX exist along a continuum of hard to easy to triage. On the easy end would be things like marketing programs for products and services that just aren’t selling right now due to the economic conditions. Harder things are more fixed costs, like rent. If you’re looking at tough times, you will want to engage your landlord, but they aren’t exactly known for their flexibility. However, if the discussion is “give us a break or we’re dead and you’ll have an open space,” they may be more accommodating. Business is all about negotiating.

You should stack rank your OPEX much as we did with sources of income, and work on reducing or deferring your biggest expenses first. As with the scoring we did on collections, it’s helpful to put your OPEX in a spreadsheet (monthly, going back 13 months so you don’t miss any of those annual expenses) and rank them in order of importance, with an emphasis on near-term cash impact.

To be clear, we’re not advocating slash and burn. We’re strongly advocating knowing where you are and what your options are.

Summary

It’s no surprise that survival can come down to prioritization of incoming and outgoing cash. Don’t wait – do this now. Make the tough decisions early and build a strategy to revisit your decisions weekly. Armed with this knowledge you can affect both in- and out-flow to extend runway, allowing your company to get the farthest on the dollars available to it.

Look for advice where you can and get help where you can. This article covers a tremendous amount of work that can sometimes be better handled by partners. Likewise, trusted advisors who have been through major downturns can be a great resource for tough times. No one likes to make these decisions alone. Two heads (or more) can be better than one, can help you find the right decisions to make, and can help you weather the storm.

For more resources on keeping your business running during disruption, visit our COVID-19 Resource Center. Need assistance? Contact our veteran Finance Performance Improvement team, who have decades of experience running companies and their finance organizations through good times and bad.

March 24, 2020

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John Kogan
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