The term “financial crisis” is a broad term that describes any situation in which the value of financial institutions or assets drops rapidly. A financial crisis can have varying degrees of severity depending on the underlying causes, which can include recessions, overvalued assets, stock market activity, poor debt management, regulatory failures and other factors, many of which may be out of your control.
There’s no crystal ball, but having a reliable sense of your future cash flow can provide you with the time to manage your crisis plan before a crisis ever happens.
Below are five steps your organization can put into place to prevent, or overcome, a financial crisis:
1) Establish a communications plan. Every organization has a chain of command, but in a crisis, the rules change quickly. If a reporter calls to ask sensitive questions, who is qualified to speak to them? Who speaks for the management team when investors come knocking? Who will be responsible for contacting customers and vendors? Knowing who will carry your approved messages to key audiences before a crisis occurs may make the difference between satisfied investors who are well informed of how you’re managing cash or disgruntled investors who read misinformation about your business challenges on their morning Twitter feed.
2) Develop a 13 week cash flow. The ability to forecast, monitor and perform in the short term can establish the foundation for a positive outcome during any financial crisis. A 13 week cash flow is an appealing structure because it provides simple visibility into when cash will come in and what order obligations need to be addressed. Hardesty partners have experienced numerous situations where a 13 week cash flow was used to help corporate turnarounds by focusing on short-term liquidity requirements and using weekly tracking to ensure fewer surprises and lower variances. Knowing your cash flow situation can help you get ahead of any potential issues before they become major problems.
3) Set up a cost reduction plan. There may come a time when cash is short and you’ll need to prioritize quickly. There’s always a lag between execution of a plan and positive impact on cash, so developing a plan after you notice the cash flow shortfall means it’s already too late. Create a line-item specific, phased cost reduction plan that can be “on the shelf” but ready to execute quickly. In this plan, ask yourself which vendors will need to be prioritized. Will you freeze disbursements? Will you reduce salaries or institute furloughs? How quickly can you revise payment terms with creditors? Once you’ve realized a cash flow shortage, you’ll want to have answers to those questions in place and move immediately.
4) Encourage customers to pay faster. A payment acceleration plan is a simple way to boost cash flow immediately. Initiate customer discounts or a rewards plan to encourage swift payment of receivables. Consider offering additional discounts to liquidate excess inventory. A good example of companies that do this successfully include discount wireless providers, who offer customers “shrinking payment” discounts for consistent early or on-time payments. Utility companies often allow lower payments for customers who pay early. Some businesses even enter customers into contests for monthly cash or gift card giveaways for on-time payments. There’s no reason your business can’t apply a similar model, according to what works for you.
5) Keep your reorganization options open. Sometimes, cash flow issues unveil deeper problems in your business, and a reorganization becomes necessary. Perhaps no one is truly accountable for business performance. Or maybe your structure drives up payroll costs even when revenue generation is at a standstill. It may be best to bring in outside management with experience in your industry to allow them to evaluate cost structure versus incoming cash.
Managing a financial crisis is rarely easy, but it isn’t cause for panic, either. If you need help with an urgent cash flow situation, we’re equipped to help. Visit us at hardestyllc.com for more information.
