Companies in Crisis
When facing a crisis, the first priority is to understand your current situation to re-establish your foundation, and then allow you to focus on how to move out of the crisis. Below is an excerpt of the checklist we have developed to help companies in crisis.
The areas are typical of the priorities that need to be considered carefully when businesses confront significantly disruptive and uncertain events. Your business may have already addressed many of the areas but running through this checklist could identify opportunities to further secure your business or to assist it through the events that are occurring.
Remember, this is your company. No one will make contact unless you ask them to so be honest and put your hand up if you need clarification or further information in relation to any of the areas raised. There are varying degrees of complexity associated with some of the areas, such as customer contact strategies, which can range from straight forward or follow researched frameworks which are more difficult to deploy, and the various methods for addressing the drivers of cash flow which cannot be simply conveyed in a checklist. Business planning is another, but right now the best based plans need to be parked to these priorities, particularly if the recent events have caused a pause to your overall business objectives!
Cash flow is the only thing that matters
Establishing the current and immediate cash flow requirements of the business and forecasting the businesses requirements over the next twelve months is critical. Issues to review include; Do you have a cashflow forecast (if not get one done – NOW!), and if so, does it need to be updated? Have you established a best and worst case scenario?
Check your debtors ledger
Check your debtors ledger for any overdue customers, and closely monitor your debtor days KPI (the average number of days it takes your customers to pay after they have been invoiced). If this is higher than your credit terms, then your customers are using you as a bank!
Inventory levels, and stock turn are also critical
There is no point in having stock on the shelf that isn’t selling, and minimising levels across the entire holding will free up much needed cash to keep the doors open. The Stock days (or stock turn) KPI will help monitor this at a high level.
Creditors is the next place to review
Ensure your suppliers are aware of your situation and keep them informed. They want you to remain in business, so they can keep selling to you, however if, like your customers, you’re buying and not paying, and they don’t know why, the credit will be cut off at some point. The creditor days KPI will help monitor this at a high level.
Taking these 3 KPIs will provide you with the fourth key KPI for cash which is the working capital cycle. This will help you understand how long it takes for circulate from invoicing the customer, getting paid, and subsequently paying your supplier.
Reviewing margin is next
Obviously in some cases there are contracts in place, or competitive constraints that will mean prices can’t be changed, however this is unlikely to be across all customers and all products lines, so review the margins, and adjust prices wherever possible.
Following this, fixed and variable expenses
Minimise all fixed expenses, then try to minimise again! When it’s a crisis situation the water cooler or coffee machine is not a critical piece of equipment! Similarly, any variable expense should be closely scrutinised to ensure is absolutely necessary.
Finally asset purchases
Again scrutinise - HARD! If there is any way to defer an asset purchase, do so. If it’s absolutely critical, then negotiate the best terms you can that will minimise the cash flow impact.
This is an extract of the checklist we’ve developed for companies in crisis. If you, or someone you know would like a full copy please let us know, we’re always happy to help.
The key to any successful business is to ensure you’re constantly measuring and managing that measurement. Sometimes it can be confusing to decide what are the key areas to be managing which is something our firm supports our clients with; all with a view to ensuring they avoid becoming a company in crisis!
This article has been published as a contribution to CompanyCrisis.co.nz as a thought leadership blog.
Author: Brent Irvine, Managing Partner nem NZ
This article is based on research and opinion available in the public domain.