What should business owners do next?
There are a few different paths I can recommend for business owners or executives planning for the future. First, they should craft two separate sets of cash flow projections for their company.
One set of projections should have flat revenues as I think sales have bottomed out but will remain weak for some time to come. These projections will demonstrate whether the expense changes made to the business are sustainable. For instance, has your company adjusted its expense structure enough to sustain itself with lower revenues for the foreseeable future? This illuminates a major cash flow issue: Has your company survived based on short-term fixes, such as stretching payables to generate cash? With payments now due and no increase in sales, getting caught up may not be feasible.
A second set of projections should show revenue increases and the corresponding effect of those increases on your cash flow.
Depending on the business, new orders mean additional inventory or staffing to meet the production levels. Both of these issues require upfront cash with the resulting cash inflow not seen for possibly 30 to 90 days or more. Consequently, the owners or executives must consider how much additional cash will be needed to fund the expenditures and what sources are available.
How can businesses fund cash shortfalls?
Shortfalls can be filled from three sources, depending on the amount of the shortfall and expected duration.
First, the bank can help fill the gap, provided there is sufficient collateral from either the working capital assets or possibly excess value in fixed assets. Second, there are mezzanine providers that can provide bridge financing on a short-term basis to get the company through the cash crunch. Finally, the owner may be required to provide personal liquidity to meet the needs of the business.
Where can businesses turn for help?
If you need help calculating your cash flow, you should meet with your accounting or banking advisers, any of whom should be willing to provide assistance. A rolling six-month cash projection that effectively encompasses a company’s cash cycle is an exceptional tool for this type of planning.
Once a company has the information from its cash flow projections, it should meet with its banker and develop a plan to fund a projected liquidity shortfall if one exists. Banks are best able to help in these situations when all of the potential factors are identified and brought forward, giving all parties full knowledge of a situation. Surprises are a worst enemy for both client and bank. A company’s foresight in this regard exhibits management maturity and planning abilities. The time to do this is now.
NICHOLAS BROWNING is president and CEO of FirstMerit Bank’s Akron region. Reach him at [email protected] or (330) 384-7807.
