It’s no secret the best time to overcome a financial crisis is before there is one. It’s also no secret that financial crises can be sparked by any number of reasons including recessions, terrorist attacks, overvalued assets, stock market activity, poor debt management, or regulatory failures.
Some are foreseen, others cannot be predicted. Regardless of the underlying cause, having a reliable sense of your future cash flow and a strategic plan in place can provide the tools to manage or avoid any potential problems.
Karl Hardesty, CEO of Hardesty LLC, a national executive services firm, realizes overcoming a financial crisis has its challenges, but it doesn’t have to be cause for panic. He offers the following steps any organization should implement to prevent or overcome a crisis.
- Establish a communications plan. Every organization has a chain of command, but in a crisis, the rules change. Assign a spokesperson to speak with media calling with sensitive questions. Make certain someone is ready to speak for the management team when investors come knocking, and someone is responsible for contacting customers and vendors. Knowing who will carry approved messages to key audiences before a crisis occurs may make the difference between satisfied investors who are well informed of your cash management or disgruntled investors who read misinformation about your business challenges on their Twitter feed.
- 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 visibility into when cash will come in and what order obligations need to be addressed. Often it can 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 issues before they become problems.
- 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. 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 executed quickly. When doing so, note 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, have answers to those questions in place and move immediately.
- Encourage customers to pay faster. A payment acceleration plan can boost cash flow immediately. Initiate customer discounts or a rewards plan to encourage swift payment of receivables. Consider offering discounts to liquidate excess inventory. An example of companies that do this are 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 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 that works for you.
- Keep your reorganization options open. Sometimes, cash flow issues unveil deeper problems in your business, and a reorganization becomes necessary. Perhaps no one is accountable for business performance. 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.
For more information about averting a financial crisis, visit www.hardestyllc.com.