This is CFO Secrets. The weekly newsletter that would like to see negative goodwill recognized on the balance sheet as ‘badwill’

5 Minute Read Time

In Today’s Email:

• 🌊 Navigating a cash crisis

• 📜 A $3bn exit 150 years in the making

• 😁 A grinning fraudster

THE DEEP DIVE

How to build a cash crisis plan

There is a liquidity storm brewing.

Last week’s newsletter covered how to spot the storm, and to steer the ship to avoid it.

This week, we will cover what to do if you find yourself in the middle of the storm.

If you haven’t got your cash crisis plan in place, you need one.

You should set out the details of the plan for your business on a few pages. Print it. Keep it in an envelope in your top drawer.

You may never need it, but you’ll sleep better for having it.

But what do you need in that plan?

Use these 8 headings:

1. Forecasting

In ordinary times, you need a 13 week rolling weekly forecast.

In a crisis that is not enough. You need a rolling 4 week daily cash flow forecast.

By definition, in a crisis, you will need to manage daily liquidity.

Monitoring the receipts that land each day, and taking decisions on who you can afford to pay.

You need one person (whoever leads treasury) to own this process and make it their first job in the morning. Ask them to do it by 8am every morning.

This means actualizing the previous days cashflows (and reconciling the bank). And then making adjustments to the following days forecasts,

When you are in a cash crisis something small could kill you. A receipt that lands a few days later than planned. A direct debit that is larger than expected.

Forewarned is forearmed.

2. Receipts

You need to increase the value of cash receipts from revenue. And get more sooner.

But, if you have a choice between more, and sooner? In a cash crisis, you should typically choose sooner.

Start with low hanging fruit. Zero tolerance on overdue debts, improve customer payment terms where you can.

Then move onto other areas... Take deposits with orders. Speed up billing cycles. Early payment discounts. Discount excess stock. Sell redundant assets.

This will cost gross margin points. But gross margin points don’t pay payroll. Cash does.

Gross margin is vital for long term health, but that’s not where we are today. We are amputating a finger to save the arm.

The more aggressively you focus on cash in a crisis, the sooner you exit the crisis. And in turn the sooner you can get back to fixing the core of your business.

3. Payments

Stating the obvious again … you want to pay less, and later.

But again, you should prioritize paying later, over paying less. For now.

Managing payments is the most difficult part of managing a cash crisis. There isn’t enough money to pay the bills when they fail due.

That will mean deviating from paying suppliers to agreed terms. Get this wrong and a critical supplier will put you on stop and you can’t operate your business. Then everything grinds to a halt. Horrible. I’ve been there.

There is no right answer to this.

Some will say be open and communicate the situation with suppliers.

It sounds like the right thing to do. And it might be…

But I’ve also seen open communication make things much worse in this situation.

I’ve seen it panic suppliers. Who then immediately demand proforma payment to continue supply, making the situation worse.

I’ve also seen suppliers notify trade credit insurers. Who then pull all insurance with zero notice. This in turn spooks all of your suppliers. You’ve got a run on your payables.

Game over.

This is where your experience and knowledge of your business will have to rule.

There are no hard and fast rules. But one thing that can help… Use a grading system for suppliers.

Based on:

a) their criticality to the ongoing operation, and

b) how likely they are to play ball when you don’t pay them on time.

This allows you to put the supply base into different groups, to then have a specific payment and communication strategy for each group.

In a cash crisis triaging supplier issues and allocating your available cash carefully is a daily job. 

Make sure you are clear on who handles suppliers through the situation.

4. Costs

A reduced cost commitment today, is a lower cash payment tomorrow.

Elevate the sign off of POs.

Send a message to the business that it needs to be frugal. Do whatever you have to, to make it harder for the business to spend money.

I once came into a turnaround situation where the business would run out of cash in two days time.

Two days. It focuses the mind.

First thing I did? I instructed the IT team to disconnect the PO system for a period of 7 days.

The culture of spending was out of control. This was a way of resetting things. I’ve never regretted taking drastic action in a crisis. But I’ve regretted not being drastic enough many times.

I made it impossible for the business to spend money. Not a sustainable thing to do, but necessary under the circumstances. And it gave the space to get a hand on the cashflow forecast and work a plan.

Not advocating this action. But illustrating that you have to do what is necessary to stop the business going under.

5. Communication

Through a cash crisis, the CFO should chair a daily call to review any changes in the daily forecast. And make decisions on which suppliers to pay and how much.

It’s important that this is the CFO. Both to embed the process, but also to show leadership.

The decisions you make will have consequences for your business. For your employees. For your suppliers. And they may be severe.

You shouldn’t distance yourself from those consequences.

You will also need the right people involved daily. Treasury, accounts payable, procurement. As a minimum. Set up a war room, and hold daily meetings as soon as the forecast is ready each day. Earlier the better.

You should also circulate a written update to the CEO (and board) at least once per week.

Pull the CEO into the daily call when you think necessary.

6. Funding

It is always preferable to fix a cash crisis from inside the business cashflows. Rather than seeking new money.

New money means dilution. And new money when you are desperate means expensive dilution. It is also distracting.

That said. There will be times when you have no choice other than to seek new money.

Make sure you have a list of possible emergency funders, and in what form / structure.

Depending on your existing capital structure you may be limited on what you can do with new funding.

Make sure you understand this detail; negative pledges, anti dilution clauses, etc. What security can you offer?

These are all things that could limit what possible. Understanding your constraints now, will save vital days later if you ever need this plan.

7. Obligations

When liquidity is a problem, you also need to be mindful of your Director’s obligations.

Depending on the law under which you operate, things can get complicated.

In many countries, if you can’t pay your liabilities when they are due, your legal duties as a Director can shift.

In a normal situation, your first duty is to your shareholders.

But in a situation where liabilities cannot be paid, insolvency law starts to kick in. Your legal responsibility can shift towards the creditors.

This is dangerous ground. And can result in serious personal consequences (especially for CFOs). Sh*t gets real.

If you aren’t sure, get advice from an insolvency attorney. This needs a strong stomach. The minutes and records kept are especially important to ensure you are protected.

8. Fix the real problem

Finally. Remember that all the above, merely buys time.

Executed well, a good cash crisis plan is like a heart transplant. A hard reset. Invasive, but necessary.

And the hard work starts after the surgery.

If you find yourself in a cash crisis, something hasn’t gone to plan. Likely the business model has failed in some way.

It’s important you understand what, and you fix the root issue.

Was it a forecasting issue, was it an execution problem, is the strategy wrong?

Whatever it is, you must fix it at root alongside managing the cash crisis.

You can use the cash crisis to reset the business. As they say ”never waste a good crisis“.

But, you will only get one reset. One heart transplant.

The actions taken to navigate a cash crisis leave scar tissue.

Make sure it was worth it.

You must ensure a better business emerges from the crisis. One that commits to never ending up in that hole again.

Now … get your cash crisis plan documented under these 8 headings.

Good luck, I hope you never need it.

MEME OF THE WEEK

I laughed at this for a solid 10 minutes

BOOK CLUB

We are spoilt for choice for fraudulent a**holes in business these days. SBF, Madoff, Elizabeth Holmes, The Enron Boys.

But go back. Way back.

To the mid-90s. Halcyon days. The times of Michael Jordan, Madonna, Jurassic Park.

Ah ….Simpler times.

Anyway it’s 1995.

And one man brought down the oldest merchant bank in the UK; Barings Bank.

He accumulated $1.4bn of trading losses over two years (remember this is 1995, so that is a sh*t ton of cash).

And he did it all with a big stupid smile on his face.

Meet Nick Leeson. The OG fraudster.

Crap trader. Brilliant writer.

His book Rogue Trader is the fascinating inside story of how it unfolded. Told in his own words.

Spoiler alert: it started small, they always do.

It’s a great insight into how d*ckheads think. You’ll come across plenty in your career, and you need to know how to spot them

FEEDBACK CORNER

A review from last week. It’s simple, but it really is the first rule for any CFO…

FRIDAY JARED

Yes Jared. Don’t creep up on us.

As always, you can find me here on CFO Secrets, and here on twitter.

Anyway, until next week…

Stay Crispy,

The Secret CFO

Disclaimer: I am not your accountant, tax advisor, lawyer, CFO, director or friend. Well, maybe I’m your friend. But I am not any of those other things. Everything I publish represents my opinions only, not advice. Running the finances for a company is serious business, and you should take the proper advice you need to make the right decisions.