Okay – you've determined that you are in a cash flow crisis – now it's time to go to work. Here are some proven steps to eliminate your cash flow crisis that is based on years of experience turning around struggling companies.
First, understand that a cash flow crisis may be only a symptom of the real problems you have in your company, but unless that symptom is relieved immediately, there will be no opportunity to correct the underlying problems. The objective of fixing a cash flow crisis is to stop the cash hemorrhaging while a plan to restructure debt and return the company to profitability is developed and implemented. Successful cash management will have both long-term as well as short-term benefits for your business. However, it is important not to lose sight of the fact that improving the cash position does not solve the underlying problems. It is a necessary but not a sufficient condition for your long-term survival.
Understand that your immediate objective must be to improve the cash position. Usually this means turning a negative cash flow into a positive cash flow as quickly as possible. The starting point is to prepare a cash flow forecast on a worst-case basis.
For crisis cash management purposes, it is generally best to begin with a relatively short period of two to five weeks. The forecast of cash collections begins with an estimate of sales which is used to estimate the collection of receivables from those sales. It is also necessary to estimate collections of beginning receivables. Then disbursements are estimated. The cash position must be monitored very closely and the forecast should be updated as frequently as weekly. The focus should be on meeting next week's payroll and remitting sales and payroll taxes on time rather than developing a three- to five-year strategy. The initial forecasts should be prepared on a worst-case basis, that is, before considering any efforts to increase cash collections or reduce cash disbursements. The worst-case cash forecasts can be used as a benchmark to monitor the success of efforts to improve the cash position.
Our next post will explain how to increase your cash collections as a way of getting out of your cash flow crisis. Stay tuned!