Skip to main content

NOTE:  This is not a blog post meant to just give you general ideas.  We are going to go in high detail on cash flow (like 2400 words deep), and hopefully you will come away with tools and approaches that you can actually use to weather the storm.  We truly do not want to see businesses laying off and shuttering all over the country, and we hope that this information will help in some small way.

In this article:


It seems like things are changing by the hour.  Every time I look up, legislation is evolving, regulations are changing, and the economy is twisting, turning, and flipping like a roller coaster.   I don’t know than any of us can predict where is this going next, and it is really easy to fall into the trap of just thinking about all the bad things that can happen.

If you are a small business owner, chances are you are worried.  I am not going to tell you that your fears are unfounded.  Uncertainty breeds fear, and there is more than enough uncertainty to go around these days.  As a leader, you have a special responsibility during time like this.  Your job is to be a beacon of hope in a climate of worry.  That means you need a plan, and you need to execute to the plan.  Today we are going to talk about that plan.

Back to Contents

Cash Flow – Why “Cash Is King”

You hear it over and over…Cash Is King.  There are a bunch of ways I could try to convince you of this, but I think Simon Sinek has done some great work on this in his discussion of finite versus infinite games.  The gist of it is pretty straightforward, business is an infinite game.  There are known and unknown players, there are no agreed upon objectives between players, and there is not going to be a declared winner based upon pre-determined rule.  Put bluntly, business isn’t football, and doesn’t end with a score after play stops.

A player in the infinite game exits the game when they no longer have the will or the resources to keep playing.  That’s why cash is king.  That’s why cash flow is critical.  Having available cash allows you, as a player, to keep playing.  When things started getting crazy, I started thinking about a lot of different things, but I quickly settled on 2 goals:

  1. Stay in the game, don’t go out of business.
  2. Do everything in your power to stay in the game without resorting to people cuts

That’s all, simple.  Stay in business, keep my team in one piece.

Back to Contents

Focusing On the Cash Flow Statement

Many small business owners I know are very income statement, or P&L driven.  They think mostly in terms of sales, margin, and net profit.  That is not a bad thing, but there are two other key pieces to your financial statements: Balance Sheet and Cash Flow Statement.  These cannot be ignored, especially in times like these.  If you are an income statement person, I hope by the end of this I can turn you into a cash flow then balance sheet then income statement person.

Your cash flow statement is broken roughly into 3 areas: Operating Activities, Investing Activities, and Financing Activities.   You are looking at the net difference  in each of those activities in a period of time, maybe a month, maybe less.

vertex cash flow statement

Sample by

Operating Activities

  • We start with Net Income. How much did you make after all of the expenses were covered?  Now, this absolutely comes from the income statement, so I don’t want you to think I am saying income statements are not important, they are.
  • From net income, we add and subtract all of the things that moved money, but didn’t show up in your net income.  This is stuff like
    • Changes in Accounts Receivable (how much you collected vs how much you billed)
    • Changes in your Line of Credit (how much you took out or paid back, or both)
    • How much you spent on buying more inventory
    • Expenses you prepaid, but are sitting on your balance sheet at the moment

When you net all of this out, you get the Net Cash Flow Provided by Operations.

Investing Activities

  • If you are in an asset intensive business like manufacturing, you are investing in equipment and things like that.
  • You may be buying or selling other assets, securities, etc.
  • You may be making loans or collecting on existing loans

Financing Activities

  • Stock of your company that was issued.
  • Loans repaid
  • Dividend Payments
  • Shareholder Distributions

When you add and subtract all of these things, you end up with your net increase or decrease in cash for the reporting period. This is a much clearer view into what is happening to your bank account on monthly basis.  This is better than just looking at net income on the P&L, because you are dealing with all the little gotchas that are moving cash on and off the balance sheet too.

Back to Contents

Running the Business for Cash

I said earlier in the post, that my goal was simple, stay in the game….do not go out of business.  Put in business terms, the first step is to stay cash flow positive for as long as humanly possible.  The basis for making decisions has to change when you run your business for cash.  For all of the negative press that private equity gets, one thing they are good at is running for cash.  It starts with the way they judge companies, EBITDA (earnings before interest, taxes, depreciation, & amortization).  This metric is generally regarded as a proxy for cash flow, that’s why they like it so much.  A company that generates a lot of cash can use cash flow from operations to pay back the loans that get taken out to buy the company.

Thinking in Terms of Cash Impact

Your decisions now need to be centered on this: “Is this decision removing or creating cash?”  Some of  your daily decisions may get modified a bit. Here are some ideas:

  • You want to sell more and make more gross profit, we all do.  However, if you are putting effort and expense into revenue that creates an Accounts Receivable or a collections issue because the customer can’t pay, well that’s a problem because it isn’t efficiently creating cash.
  • If you are able to move expenses through a credit facility (Lines of Credit, Credit Cards, and the like), you can get the benefit of the expense now, but defer the cash outlay for a little while.  I am NOT suggesting you run out there and get yourself over-extended.  What I am saying is that you can buy yourself some time to get your inflows flowing, and move the timing of receivables and payables closer together.
  • When you have to pay an expense starts to become as important as what the expense is.  This is why working with vendors on terms is so important.
  • Look at prepaid expenses.  Normally, I would be a fan of prepaying for a service (like web hosting or something) a year in advance to get a discount.  If you have done that already, good for you, those are things that will not drain any more cash, you already did it.  However, if you have an annual renewal coming up, paying a little more and switching to monthly for a while might be a good idea.  The hit to cash is lower, and you are conserving your bank balance and credit facilities for other things.
  • Talk to your bank about any debt you have.  Maybe you can go interest-only, or work out a different pay plan for a temporary period of time.  This isn’t 2008, the banks are not over-leveraged.  The government is looking to help prop up bank lending to support this, so look into it.

Back to Contents

Cash Flow for Big Assets Like Inventory

Companies that are inventory intensive, like distributors for example, can use inventory to their advantage.  Too many times, I see companies panicking and making broad based inventory cuts to try and create cash.  Right idea, but you don’t want to be doing this with a chainsaw.

Look at inventory the same way you look at expenses.  Ask yourself, is this inventory making me  money or not?  Not all inventory turns are created equal.  The less margin you make on an item, the faster you have to turn it.   Put simply: carry less of lower margin items.

Your inventory strategy, should you need to do a reduction to create cash, should be based on the idea of doing the deeper reductions on items where you make less margin.  By prioritizing your inventory/purchasing dollars into higher margin products, you create more cash per inventory dollar than you otherwise would.

Nobody wants to disappoint a customer by not having items in stock that they want, but if you are going to disappoint them, do it on an item that has the least negative impact from the revenue loss caused by the missed sale.  If there are things like prepaid freight, rebates, etc. in the equation, you have to take that into account and look at what creates the most cash.

Back to Contents

Government Assistance for Cash Flow

The Federal Government is about to infuse an enormous sum of money into the economy.  It makes me ill to think about the amount of debt that is about to be piled on, but there’s nothing that will stop it from happening at this point.  I have heard a lot of different things, but one of them was that there would be forgivable loans if you put the money toward keeping workers employed.

There was also talk about more funding from the SBA, and that the government is going to act as a backstop for banks so that the lending can be local, which will be faster.

Some states, like California, have a work sharing program.  That means, subject to qualifications, that the government will cover part of employee costs if you don’t lay them off.  This can be a big help to supplementing cash flow when things are tight.

These things are going to evolve quickly, so keep yourself informed.

Back to Contents

Tough Cash Flow Decisions – Customers

You want to take care of your customers, but what if you cannot take care of them all?  What do you do if they are having trouble paying for your goods and services because they are hurting too?  The key here is engagement and creativity.

One thing I would recommend if you are not already doing it, is to give your customers more options.  As an example, our company has decided to make payment by credit card much easier and much more visible.  We are providing customers the ability to pay online now, right from our website, which is not the norm in our space.  Yes, this costs us some money in the form of fees, but 97% of something today can be much better than 100% (or 0%) much later on.

Other Strategies

If you have limited capacity or product, and you have to prioritize customers, you may need to prioritize those customers that do the most to help your cash flow because they pay timely.  It’s just a fact of business, if you cannot collect the cash, the sales wasn’t worth anything, and actually cost you money.  Open dialog with your customers can help this.  Establish a payment plan if you need to, anything to keep the cash flowing in.  Put a sunset clause on it, make sure they understand that it expires on a certain date.

Keep an eye on your receivables, get in front of the storm.  If you see customers fall behind, check on them, ask if they are ok, empathize.  You need to know what’s going on or else it will make you crazy.

Finally, talk to your bank, look into getting credit facilities that are based on your receivables, this can help take some of the stress out of your situation.  Yes, it will cost you a little money, but it keeps the cash flowing, and that is the most important thing.

Back to Contents

Tough Cash Flow Decisions – Payroll

This is where the rubber is going to hit the road.  At some point, you may face the decision that you can only survive the storm by reducing headcount.  It’s a big expense, and it is a really easy target for expense control.  Having said that, let me ask a couple of questions to make you think twice about it….

  • How hard was it for you to recruit and train these folks?
  • How much will it impede your business when things normalize if you have lost valuable talent?
  • What impact is it going to have on the economy if a bunch of people are out of work?  Consumer spending is the leading driver of the economy, do your part to try not to suppress it.

Does this mean put yourself out of business, but keep everyone on the team?  No, of course not, but it does mean that you have to protect your team as long as possible, so make it a last resort.

Alternatives and Things to Consider

In my experience, people would rather make less money than no money.  Get creative, I would bet you that, on par, your team would rather take an across the board pay cut than watch people get laid off.  Layoffs create fear and destroy company morale, keep that in mind.  It happened to me in 2009.  I was grateful just to be able to keep working, even if my paycheck came down a little.

If you go the headcount reduction route, make sure you do it in a way to protect the affected people’s ability to receive unemployment benefits.  Give employees as much runway as possible.  Do whatever you can to make their situation the best it can be.

Back to Contents

Closing Thoughts

We face headwinds to be sure.  If we face them together, and play the long game, chances are that we will emerge stronger on the other side.  The US economy, and the human race at large, have survived much worse than this.  We will prevail, we will get past it.

If you can keep your eyes on the prize, and focus on making sure you have the resources to stay in the game, you will survive.  Your business will emerge from this turmoil.  If you can do it and protect your team from the unemployment line, so much the better.  That alone will do more for our collective economic future than anything.

Good luck and may your actions and endeavors be fruitful and prosperous.

Back to Contents