After last week’s post emphasizing the importance of cash and making sure your business is still breathing, let’s use this post to add some detail to your cash picture.
Start by listing all your bank accounts and their balances. If you’re starting with book balances, add back all those checks you’ve been holding until you get the money to send them. It’s best to void the checks in your accounting system and have corrected cash and payable balances to work with.
Next, examine your list of customer receivables. An aging may help, but you will need to list who will pay you and when. Call the past due customers. Threaten them with shipment halts if they don’t pay. Offer discounts for prompt or early payment. A 1% per month early pay discount is worth 12% on an annual basis, a great rate in today’s interest market. Offer more if you must, but get the cash in the door.
Add the first week’s receipts to the beginning cash balance to get your “Cash Available.”
Now identify what you have to pay this first week. I recommend you start with those items whose payment will keep you out of jail. That is, payroll taxes, sales taxes and other government trust funds. In most places, failure to pay these trust fund taxes is a felony. I suspect defending yourself from felony prosecution will distract you from your business.
After the payroll taxes and other government trust fund obligations, list your gross payroll. You probably need your employees to sell, make and ship your product, so keep them paid. They know that the business is in trouble, so paying them on time helps preserve morale.
Next up are the vendors and suppliers who require payment in order to make or ship your product. Be bold and call them. Ask for help. See how little they will take to keep shipping. Reduce your orders to the minimum needed to ship product. Shop around for other sources before you’re cut off.
Add a line for payments to your lender, but DO NOT enter a specific number – at least not yet. We need to see how much we have to operate the business before we can pay the Bank.
Subtract the subtotal of these “have to pay now” obligations from the Cash Available to get “Cash Over or (Short).”
If Cash is Over (a positive number), use this as the first line of week 2 and repeat the above process for the next 13 weeks. This should be long enough to cover all your existing receivables and give you an opportunity to use the cash receipts for the next six weeks’ sales.
After the end of the first week, compare your actual cash receipts and disbursements to your estimates. Change the next weeks’ estimates to reflect what you learned.
Maintain this process until your Cash Over number grows every week for six weeks and your calls to customers, vendors and the Bank are more pleasant and less frequent.
On the other hand, if Cash is (Short), which is to say that number is negative, revisit your collections and payment amounts. Your business depends on driving cash to positive levels. If Cash remains (Short), after several attempts, call GGG immediately and add a line for “Crisis Manager Retainer.”
Next week we’ll continue this conversation by fine tuning our cash control. For now, check out last week’s post to learn why Cash is King.
Have you ever gone through a process like this? What were the results and how did it go? Do you have any questions about what to look for?