Know Your Current Cash Position
For several companies, cash inflows are on a temporary hold. How long can your company last without any short term cash inflows? The following ratio can help you better understand your most liquid reserves:
Cash + Cash Equivalents – (Restricted Cash)
Typical Month’s Expenses
This ratio will let you know how many months your company can operate at its current rate without any additional cash inflows. If you have outstanding receivables and you expect to receive these in the next month or so, you can include those amounts in the numerator.
If your company has ceased operations but is committed to maintain payroll, the following calculation can help you understand how long it will be possible to do so:
Cash + Cash Equivalents – (Restricted Cash)
Typical Month’s Payroll + Health Insurance + Rent & Occupancy Expenses
This ratio will help you evaluate how long it is possible to maintain your employees’ payroll and benefits. In these difficult times, remember that most of the extraordinary work your company performs is because of your dedicated personnel. You may get to the point where cutting personnel is necessary; however, explore other line items for savings, think creatively, and do your best to stick to your company values.
These two ratios are a basic approach to determining the immediate cash flow needs of your company. Another approach would be to prepare a short term cash flow projection that will show the expected cash flows for the next six months. You will want to modify this projection from your original budget to better fit the current economic situation.
Keep Communication Open
When under crisis, a common response is to go quiet. We put so much of our focus on solving the problem at hand that our communication with others is no longer a high priority. Other times we are on our planned course without a change or resolution and feel like a broken record with no new information to share. In a time of crisis, communication is key to keeping your employees and customers committed to your company.
Early in my career, I worked for a national CPA firm. The only two audit partners in our local office left the firm at the same time. Initially, our corporate office communicated the desire to hire a new audit partner for our office and until someone was found we would work with audit partners from other out of state offices. It took nearly two years for a new audit partner to be hired for our office. During these two years there was little to no communication to our audit department from the corporate office. During this span, we lost an additional 20% of our audit personnel without hiring new employees.
Even if the corporate office had communicated failed interview attempts, the communication itself would have provided hope that a plan was in place and was being enacted. This pandemic will pass and employees and customers need to know that you are there and are doing your best to continue operations. Even communicating your failures will help them see what you are facing as an company and can help keep them committed.
Don’t Delay
The earlier you are able to evaluate your cash flow position, the more cash you will have for the plan you put in place. Too often companies will put off this decision making to see how the situation progresses. Ten seconds into the recent earthquake, I admittedly found myself in the same spot of the room as when it had started. I found myself waiting for the earthquake to pass without taking any action to put myself in a safe spot. The longer an earthquake lasts, the more dangerous it becomes and if you passively sit and wait it out you will find yourself far from a safe spot. We must act immediately to get ourselves in the best position to move forward.
If you would like help with projecting cash flows for your organization, please contact your Larson advisor for more details.