Soaring Cash

Preface: Cash management is crucial during a financial downturn. This blog is designed to provide an awareness of proactive cash management to avoid a situation of illiquidity.

Soaring Cash

Credit: Jacob M. Dietz, CPA

“For riches certainly make themselves wings; they fly away as an eagle toward heaven,” according to Proverbs. Entrepreneurs sometimes painfully experience the flight of cash from the business. Sometimes cash flies away and nothing can keep it. Maybe the economy or a disaster destroys it. Other times, however, a wise entrepreneur can take steps to avoid the problem of no cash. Proactively consider what may be ahead, and actively avoid the pitfalls and seize the opportunities.

Time Travel

Imagine you are planning to scale Mount Everest. What should you take along? While you cannot physically travel ahead in time to see your exact needs, you can mentally travel ahead in time to see what you might need. What did other climbers need? What did you need when you climbed other mountains? Are there any weather reports you can read?

Likewise, you cannot literally travel through time to see what cash you will need and what cash you will have three months from now. Take a mental time travel trip, however, through the next several months.

For example, if sales in the second quarter are as strong as last year, how much inventory will you need? If sales are 75% of last year for the same quarter, how much inventory will you need? How much cash will you need to buy that inventory, or how will it be financed?

The statement of cash flows shows what happened to your cash over time. That can be a useful starting point, but especially with the current uncertainty it is no guarantee of future cash flows. Consider calculating different cash flow scenarios. Are you strong in all the scenarios? If not, can you get stronger?

Be Proactive

If you are feeling cash weak and see a Goliath roaring at you from the other side of the valley, then do not cower in your tent. Get your stones from the brook or develop a plan to get the stones.

How quickly should you move? Consider how quickly you must move. If cash appears to be stable for only a few weeks, then you may want to move quickly to shore up cash. On the other hand, if cash appears to be stable for at least six months, then you may want to bide your time to see how some of the uncertainty plays out before committing to one direction or another.

If you see that you will not be able to make payments, however, do not just ignore them and hope no one notices. Consider proactively going to the creditor and discussing options.

Some options you could request might be:

  • A moratorium on all payments for several months
  • Interest-only payments for several months
  • A waiver on certain bank covenants.

Do not limit yourselves to just these options, there could be other ways that you could proactively negotiate with your creditors if cash is tight.

It is beyond the scope of this blog, but also consider your options for new cash inflows and your options to minimize cash outflows. If you are unsure how to do this, ask your accountant for ideas.

The future is just ahead. Although businesses cannot live in the future, if they prudently plan for it, they may be able to take steps today to help the future.  Consider the possible scenarios before they hit you. Then, act at the appropriate time to avoid pitfalls or seize opportunities.

This article is general in nature, and it does not contain legal advice. Contact your advisors to discuss your specific situation.


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