One of the things I love about my job – and indeed one of the reasons I pursued a career in business – is that business is as much an art as a science. As a consultant, I am often brought in to put out fires, whether it is helping a company through a major transaction or restructuring, filling in for a key executive departure or addressing a complex accounting or financial matter. Working in the middle of a crisis is the norm, and success is not about following a step-by-step formula. Every situation is unique. Yet, from my recent experience steering a company through COVID-19 in the middle of an already difficult restructuring, I have identified certain key cash flow crisis management strategies that allowed us to survive. These strategies should be considered essential tools at the disposal of every CFO, CEO and business leader who wants to stand strong and be ready to battle any potential disruptions.
1. Develop a robust cash flow model.
I worked as an Interim CFO for a client in an industry that was deeply affected by the pandemic, which all but paralyzed the company’s business and dramatically reduced revenues and cash inflows.
As the company was already undergoing a major pre-pandemic restructuring, one of my key tasks was to develop a 13-week cash flow forecast that would be able to predict the company’s cash position at the end of each week, to the highest level of precision possible. (The goal was to have a variance of less than 1% from the forecast to actual.)
In order to achieve that precision, we worked closely with our IT team to extract daily revenue data from the company’s sales-tracking (POS) system. This data included sales and returns (based on estimates and, in some cases, specifically-identified transactions) by day, and it factored in a usual delay in collection. (Deposits from credit card sales generally lag the date of the sale by two to three days, depending on the processor.)
We also worked with our HR team to model payroll to the employee level and factor in all known variables, including specific labor forecasts provided by the field. (This proved particularly challenging. The company had 3,000 employees across multiple locations nationwide and several hourly/part-time employees with variable schedules).
Finally, we estimated vendor payments (i.e., Trade AP) based on historical data, known services/contracts engaged and other such data.
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2. Swiftly identify and address benchmark shortfalls.
Once our cash flow model was complete, and taking into account all financing sources (e.g., available lines of credit), we used the model to make decisions based on our calculated liquidity runway under various scenarios and variables – both controllable and non-controllable. Layoffs were identified and implemented (i.e., furloughs and permanent terminations), discretionary expenditures were eliminated and, whenever possible, contracts and/or terms with vendors were negotiated (e.g., extending payment terms, replacing vendors with more cost-effective options).
3. Develop a Plan B. (Hire problem-solvers, and think outside the box.)
In parallel to the work of the Finance team, and under the direction of the CEO, the Operations team immediately began working on strategies to adapt our business model to function within the new-normal operating environment. We focused on:
- Strengthening our revenue verticals that were less impacted by the changing environment (e.g., digital offerings),
- Introducing new or modified services that could deliver our product in a contact-less environment (e.g., through videoconferencing) and
- Minimizing fixed costs on our lines of business that were completely shut down.
Why is focused, timely cash flow crisis management so important? Learn more about cash flow management in our video Q&A:
4. Look outside the company for support.
Additionally, the company engaged external parties to explore potential long-term financing options including equity, debt and restructuring. This involved seeking the input and expertise of outside legal and financial restructuring experts, existing and potential investors, lenders, regulators and even explore ventures with competitors.
5. Be transparent and timely in communication.
At various points throughout the process, the company informed all stakeholders – notably, all employees – of the company’s financial standing, potential outcomes and upcoming changes, including the severity of the challenges before us.
While the above appear to be obvious, as I think through the situation we were in, all odds were against us. Without any one of the above items (which I have personally seen absent from many organizations), we would have failed.
Also, I would be remiss if I didn’t point out two additional key factors that were instrumental to our success: 1) we had a tremendously talented, loyal and motivated management team that simply would not give up, and 2) we had a visionary CEO who, even within his short tenure at the company, quickly fostered a culture of innovation, inclusiveness and transparency.
Through astute leadership, effective use of technology and financial analysis tools, timely action and open and honest communication, the company survived and is now well positioned to emerge from the pandemic stronger than ever and ready for growth.
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About the Author
Jorge has more than 18 years of finance and accounting experience across the real estate, financial services, consumer products, telecom and high-tech industries in both private and public companies. Jorge started his career with KPMG’s audit practice, where he progressed through the senior manager level before leaving to join one of his clients in a financial reporting and accounting oversight role. Most recently, Jorge was a Transaction Advisory Services Director at KPMG and PwC, where he advised companies on M&A transactions, providing sell-side and buy-side due diligence and pre/post transaction accounting support. Since joining 8020 Consulting, Jorge has performed or overseen all accounting and financial reporting processes (including SEC filings), participated on several stages of acquisitions and divestitures, and tackled a host of complex technical accounting issues, including GAAP conversions. Jorge holds a BA in Accounting and Finance from the University of Texas at El Paso and is a CPA licensed in Texas and Florida.