Cash is the lifeblood of the business. Colin Wright explains how the business can manage liquidity through the ‘Cash War Room’ concept, and who should be involved in ‘Cash War Room’ activities.
The Government has set up a War Cabinet to plan Australia’s response to the current pandemic crisis. Similarly, your business needs to set up a Cash War Room to plan your response to the unfolding crisis so that you can survive this period. The immediate risk to ongoing business is one of liquidity.
Therefore, there are two key issues that all businesses need to focus on.
- Ensure you have the CASH to deal with all the circumstances you might face, and
- Ensure you are AGILE enough to respond to changing circumstances if or when the environment changes
So, what would a war room look like and what would it do?
Your Cash War Room structure
Senior management must be involved. You will be making decisions about sales and marketing activities, operational activities, and resourcing the business during changing circumstances.
A critical member will be the CFO or Head of Finance. This person will be responsible for ensuring the strategies are aimed at ensuring that cash reserves will be sufficient for the survival of the business. This needs to be modelled in the face of major uncertainty. The uncertainty means that the CFO needs to model a range of scenarios involving many variables, both internal and external. The questions are: what will be the impact on the business’ critical cash reserves under different scenarios? And, how should the organisation respond?
Your Cash War Room activities
The following concerns need to be addressed:
- What will happen to sales, and what are the best- and worst-case scenarios?
- Will your customers continue to meet their payment terms, or will they start hanging on to cash and delay payments?
- How will we respond to those circumstances?
- Are your variable costs truly variable?
- How leveraged is your business to sales volumes? This refers to the level of fixed costs in the business. What can be done to reduce the fixed costs in the business while protecting the operational capability of the business so that it can ramp up again once markets start to reinvigorate
- How secure is your supply chain? Are our suppliers able to continue to supply? How secure is their business? Do we have alternative sources of supply?
- Are you able to stretch payment terms?
- While the business world is turned upside down, what are the opportunities to significantly change the way you operate your business in the future?
- New ways of doing business and driving productivity improvement in this environment present opportunity to reposition your business and its cost base
- What alternative sources of funds do we have access to? These will include:
- Government assistance packages and grants
- Bank loans, overdrafts or lines of credit
- Other sources of debt funding
- Capital injections
- Sale of assets
These and many other factors must be considered and included in scenario planning models. This type of modelling needs to be reviewed and revised on an ongoing basis as the circumstances will continue to evolve and change.
The critical focus on cash and agility are the keys to your survival.
CASH
We all know that cash is the life blood of all business. In times of heightened uncertainty, you need to have a higher buffer than at other times. This is because there is increased risk. This means that it is not just a matter of ensuring that you always have positive cash balances. It requires the business to have a healthy buffer or options for alternative funding if it becomes necessary. It also needs clear decision triggers to change direction, and scale up and down.
AGILITY
Your business needs to be mindful of how quickly it can change course. You may have made decisions that you have started to implement when there is a major change in circumstances. The speed with which you can respond to these changes will have a big impact on your performance.
The activities that you undertake in your Cash War Room will also be the activities that enable you to successfully rebuild the business when things start to pick up. After the crisis has started to ease, will your market pick up only gradually or will it pick up quickly? Will the very nature of the industry you operate in change in some way that means you need to reposition or refocus your business model?
So many factors have to be understood along with the magnitude of their impact on your business. The effectiveness of your Cash War Room will determine not only your survival, but how strong your business is in the post-crisis world.
The Virtual CFO Group has a team of experienced virtual CFOs and financial modellers that can play a key role in your Cash War Room. Contact us today to arrange an obligation free consult to discuss your Cash War Room strategy.
