📬 Feeling Vulnerable: Which scenario can bring a whole business crashing down?

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JEV from Mexico asked:

My board is divided. Some members want to sell non-strategic assets in order to pay debt, while others want to develop them. I think that if we pay off debt, our hospitality business will be healthier, but I feel like I am in a lose-lose situation because some board members will not want to hear anything about it. What should I do?

Thanks, JEV. At its core, you have a board that is divided on strategy.

And the problem you have is apparent in your question. You described the assets as ‘non-strategic,’ but some board members want to develop them (implying they see them as strategic).

So the first thing to do is examine why that difference exists. With a clearly stated strategy, it should not be a subjective matter whether an asset is strategic or not. It should be pretty clear.

So, it sounds like you need to go around the strategic cycle as a board. What is it you are trying to achieve and for whom? Why? What risk appetite do you have? Some long-range planning will help here, too. Run scenarios based on different definitions of what is or is not in scope for the strategy. That will show the effect of the sale proceeds from non-core assets and how that reduces the debt and interest burden.

If you are right, the numbers should show it clearly.

And make sure you articulate the downside implications too. Run a sh*tcase scenario for each option so you can demonstrate how resilient the business is in each case. This will help clarify what risk appetite your board has.

Your example is surprisingly common, but it’s why strategy-setting processes exist. So you can seek clarity in short bursts, then spend as much time as possible in execution mode. Without second-guessing if you are right the whole time.

If once you’ve done this, you still can’t force agreement at a board level, then it gets more complicated. As it starts to feel like a more fundamental problem. In that situation, it is the particulars of your operating agreement and voting structure that are important.

Best of luck, JEV. I hope you’re able to work it out.

NumberGoUp from New York, United States asked:

I am a newly minted CFO of a small-to-medium real estate development and holding company. Treasury management is the hardest part of the job, and what I was least prepared for in my first CFO gig. As a company, we are extremely successful in finding value-add investment opportunities and creating massive returns on capital. We are almost always north of 50% IRR on our deals.

The rub comes from operating on razor-thin levels of liquidity. The "reasoning" is, "Why would we hold any liquid capital at 0-10% returns when we can put it in projects producing 50%+ returns?" I can come up with a lot of reasons on my own (bank underwriters have tremendous heartburn when they look at our balance sheet, for example). Oh, and the owners also don't have a personal honey pot - all equity has been created, bootstrap style, by buying, refinancing, and selling. But all equity created goes instantly into the next project.

I need to figure out the right way to think about and execute a Treasury strategy, including how much liquidity to maintain on the corporate and personal balance sheets. Banks always want too much, owners always want not enough, and I have to straddle the line between the two. Any guidance would be helpful.

Hey NumberGoUp, are you showing off?

50% IRR deals on tap? I’m not surprised your owners don’t want to hold much cash. But nothing that returns 50% lasts forever, and the bigger risk here isn’t your returns, it’s your liquidity fragility.

Your job now is to map out the scenarios that would bring the whole thing crashing down. What would it take to break the machine? A spike in interest rates? A freeze in refinancing markets? A delay in permitting? A collapse in valuations? Bad things don’t line up politely. They tend to hit all at once.

So start with a vulnerability analysis. Build a set of scenarios that combine multiple adverse shocks, and model out what happens to cash flow, project-level equity, and corporate solvency. Then look your owners in the eye and say, “This is what takes us out.” If they’re rational and not delusional, they’ll listen. At the very least, you’ve done your job by showing them the risk.

Next, think in terms of a ripcord. If they insist on running hot, you need a plan B. That might be a pre-approved unsecured facility, an undrawn line of credit, or even a cash-secured corporate credit card. You don’t want to use this capital, but you do want it in your back pocket when the unexpected hits. Think of it as your emergency oxygen tank. Invisible most of the time, life-saving when needed.

Just be clear that this is ‘emergency only’ liquidity. The only time this capital gets touched is if something external breaks the system before you can react. So communicate that to your owners. Set the expectation that this capital is “dead” unless it’s crisis time.

Finally, push them gently to build a small core of retained liquidity. Not because it earns 5 percent, but because it gives them the right to keep playing. And that right is worth more than any single project.

This is what treasury strategy is in a high-return, high-risk business. Figuring out how to sacrifice a tiny fraction of yield for a massive improvement in resilience.

If your owners are smart, they’ll value the trade-off.

Cathy from London, UK asked:

I work for a founder-led, seed Saas business which has finally achieved profitability after many years of accruing losses, after growing its revenue by about 40% p.a. for the last 2 years. The founder is easily bored and wants to build a new software product, but is opposed to introducing any new investors (49% is held by external investors who would welcome an exit opportunity). The business is cash-rich owing to its upfront annual payment terms.

Is it wise to use working capital from the established business operation to fund this, or do we risk jeopardizing a decent business with a high-risk venture?

Cathy, at its core, this is a capital allocation question.

And based on how you describe it, I’m not crazy about this.

It sounds like getting to breakeven has been a grind. And now that you are finally there, your founder wants to risk a working capital funded cash pile on a crap shoot? I don’t like it.

And if I were the minority investors looking for an exit, I’d be pissed off, too.

I can think of two better ways to use that cash richness:

So it feels to me that your founder’s head has turned before the job is done.

Also, don’t forget, negative working capital is wonderful when sales are growing. But if that changes, you will have an enormous cash outflow to fund. So, be careful moving any working capital cash flow into any investments that are too illiquid.

Your risk appetite here depends on the strength of the foundation of your revenue line.

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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.