My friends Andy Whitman and Gary Hirshberg did their patented, fabled “Cash is King” exercise for a 1,000 attendees at a recent financing webinar produced by Natural Products Consulting and the Hirshberg Entrepreneurship Institute and hosted by Naturally Bay Area. It began with Andy’s admonition that “most businesses don’t fail because they were bad ideas, they fail because they run out of cash.” My friend Elliot Begoun maintains that “capital efficiency is the new velocity."
Of course, selling off the shelf is very important, but so is stretching your runway and being very smart and discerning about where you invest your scarce funds. This often separates the ones who hang in long enough to make it from those who did not quite understand the concept. The days of abundant, cheap equity, raised at frothy valuations enabling companies to buy distribution and get to a Hail Mary pass exit where everything falls into place are basically behind us.
During these challenging times, an intense focus on cash management is an essential requirement for running, growing and staying in business. What follows are some simple actionable steps to consider and practice as you manage your cash flow.
1. Know where your brand stands.
This means having a sales plan that flows into your profit and loss statement that flows into your cash budget.
- Everyone should have a simple, bottoms-up sales plan based on how many customers, selling how many SKUs, at what rate per week and at what price to understand monthly retail revenue. Add to this your ecommerce, any DTC sales and other channels to get total company sales, minus your variable, sales and marketing costs to arrive at your contribution so you understand your breakeven. You can then show the realistic timing of your receivables minus deductions and trade spending against the timing of your outflows. Gary Hirshberg (co-founder and longtime chairman and CEO of Stonyfield Organic) has a handy model available on his Hirshberg Entrepreneurship Institute website available to all here.
- This must be done weekly, if not daily.
- A challenge in an era when many companies have a demand problem more than a supply problem is carefully managing the interrelationship of purchasing raw materials, production planning, inventory (for many a vast reservoir of cash) and orders out the door.
- Wrapping your arms around your cash conversion cycle is an essential step in understanding your cash flow.
2. Trim, trim, trim wherever you can.
As we speak, online and retail sales of most consumer packaged goods categories are shooting through the roof.
- Are you cutting back on discounting? Other than promotions which are “in-flight,” i.e., committed and even in ads by retailers, most brands, distributors and retailers are suspending promotional activity right now. Cutting back on trade spending in the short term (which may easily run 20-25% of sales for emerging companies acquiring a lot of distribution) will dramatically help cash flow.
- Likewise, if you budgeted for demos or special event sampling, those are not happening.
- Trade shows and conferences probably aren't happening through the summer.
- Slotting and free-fills really depend on the retailers still doing category reviews and resets, but probably less than you budgeted.
- Can you work with your brokers and brand management companies to defer some of their fees in the short term?
- While valued partners, can you suspend some fixed costs such as PR and social media retainers or have them work at a reduced schedule?
- Some landlords are agreeing to rent abatements right now.
- Go through your entire accounts payable list and see what can be cut.
- Remember, every dollar that goes out the door today is not available later to weather this storm!
3. Where you can’t cut, see if you can extend terms.
Ingredient suppliers, co-manufacturers, service providers—same thing: go through your Accounts Payable list and where you can’t cut, see if you can extend terms.
Gary Hirshberg’s memorable line is “If you don’t ask, you don’t get.”
4. Embrace the red pill.
Take a cold, harsh, unvarnished and non-sentimental view of your business.
- Can you reduce SKUs, think of the world in terms of 80/20 and jettison some of that long tail? Then, efficiencies will improve and this will be reflected in cash flow.
- This unfortunately applies to people too. Will you have a frank, candid talk with your team and rather than doing layoffs, ask people to take a 25% reduction in pay (or a deferral which gets paid back at a later date)? When your back is against the wall and it comes to survival, some brands will unfortunately have to make some hard decisions about cutting staff.
5. Be a vulgar opportunist.
Can you pivot towards the here and now?
- My friends at Soapbox Soaps got into—wait for it—the hand sanitizer business. Much incremental revenue and cash ensued.
- Can you push towards getting paid as quickly as possible? Retailers want to keep their shelves full and distributors want to maximize shipments; if they can pay you promptly, you can be a good, healthy supplier.
- Do you have excess inventory that can be converted to cash? Liquidators like Grocery Outlet, Ocean State Job Lots and others are still open and, assuming you get a reasonably fair price, can help with cash flow.
- If you are not optimizing and maximizing all you can do with regard to ecommerce, DTC, home delivery, Instacart—hello! This is your moment to do so.
- Our environment is evolving in real time, and some restaurants are selling groceries. Do you have something to sell to them?
6. What to do if push comes to shove.
- Choose between spending that has an immediate impact versus long-term marketing investments. I am afraid some long-term considerations are on hold for now.
- If you have a commercial bank line of credit or term loan, can you get flexibility on your covenants? I.e., get them waived as long as possible? Can you get payments waived entirely or reduced to interest only for a short-term period (say, three to six months)?
- If you had a strong 2019 and a good first quarter of 2020 (e.g. good profitability), you may still qualify for lending (conventional or SBA) even though you may be experiencing disruption right now. If you have a strong package overall (good credit and collateral) and can provide a thoughtful set of projections showing payback ability even on a reduced topline, you would have a good case.
- If you have a line of credit, hopefully you drew down your line back in March. But if not and you still can, do it now!
- Understand every debt product out there and how to access them through factoring, asset-based lending, term loans and royalty financing. A few great resources for advice on debt options are Keith Kohler of K2Financing, Marshal Lebovits, Express Trade Capital and, for companies further along, Circle Up.
7. What assistance is available?
Are you applying and getting what you are eligible for? Do you qualify for PPP, EIDL or any SBA assistance during these unprecedented times?
- Your accountants, attorneys, other advisors and peers will help you understand what’s out there and what the qualification criteria are.
- Likewise, there are grants from companies including Facebook, GoFundMe and Google. Are you scouring all possibilities? Find out by talking to your peers and service providers.
- Does your business insurance provide for interruption insurance?
- Explore all state and local COVID-19 relief resources.
So, yes, cash flow is the lifeblood of most businesses, especially in the era of COVID-19. All businesses need to understand where they stand today, the immediate steps to improve their situations and the longer term moves that will help strengthen their businesses. Always keep one eye on today while and the other on where you are headed; do your best to balance the two.