“In crisis, we justify making money at any cost, right now, even if it means skipping taxes or selling our souls.”

– Profit First by Mike Michalowicz

Seven Cash Flow Tactics to Survive Your Strategic Pivot

…28% of Businesses Have Already Pivoted to Survive

According to a recent Inc. study, 90% of businesses have seen a negative effect on them as a result of the global pandemic, including loss of sales and layoffs. 28% of businesses have already pivoted their business model to survive. Long-term strategic planning has been delayed by many organizations until conditions are more predictable.

This next statistic is AMAZING. 87% of businesses applied for COVID funding under the Paycheck Protection Program (PPP). Therefore, nearly every company who has seen a negative effect, has applied for Federal funding. If you wonder why your banker has not been quick to respond to your questions, there is your answer. They have been busy processing loans.

Despite the PPP funding, nearly, half of the organizations have stated they will need additional cash or capital to get through the current challenges. The major reason stemming from decreased sales due to the shelter in place provisions combined with the current recession challenges.

The goal of any Strategic Pivot should be not to just Survive, but to Thrive in the long run. These strategies should help prevent you from skipping your taxes and selling your souls.

Step #1 – Categorize Your Operating Sources of Cash

Spending Cash – Checking and savings that is available to you right now. Include company short-term cash investments that may require a slight loss of investment to liquidate.

Operating Capital – Check your accounts receivable and validate with your customers what is likely to come in in the short-term or not at all. Factoring your accounts receivable may be a possible route to accelerate your short-term cash flow needs but it will come at a cost. Inventory is potential cash; but you may not be selling a significant portion of it due to market conditions. It is worthwhile to eliminate your slow-moving inventory through deals.

Property, Plant and Equipment – Selling PP&E is for worst case scenarios. If you are pivoting out of a business and do not plan to return, you should consider selling those assets; however you will most likely yield a low amount of cash from this activity especially in this environment.

Step #2 – Categorize Your Cash Outflows

Operating Expenses – This includes required monthly expenses such as Salary, Payroll, Tax, Rent. This includes all of your salary and payroll expenses including payroll taxes. If you are deferring your payroll taxes, please remember to classify those to short-term liabilities so they do not surprise you when the IRS requests them later.

Short-Term Liabilities – Accounts Payable and Loan Payments due on a monthly basis. If possible, work with your suppliers, landlords and banks for extended payment terms.

Step #3 – Calculate your Crash Cash Burn Rate

Your Crash Cash Burn Rate is your total Spending Cash divided by the monthly Operating Expenses and Short-term Liabilities. This will tell you how many months you can last without any sales, collections of accounts receivable, new financing or deferment of liabilities.

Businesses and organizations should have at least a 3-month Crash Cash Burn rate. Based on our collective experiences this past few months, we now can see why this is so important. When panic and fear develops within an economy, spending reduces significantly. Crash Cash should be set aside in a separate bank account and only used in survival times like these.

Step #4 – Calculate Your Projected Operating Cash Burn Rate

Sum your Spending Cash plus anticipated Account Receivable Collections. Add your latest forecast of sales. Then take that sales number and divide it by 3. Why by 3? In a pivot environment, nearly everything takes 3 times longer than you think.

(Spending Cash + Anticipated AR + (Sales Forecast / 3) ) / (Monthly Operating Expenses + Short-Term Liabilities) = Projected Operating Cash Burn Rate

Business and organization should create at least a 6-month Projected Operating Cash Burn rate to manage through a Pivot. Best case scenarios are one year of Spending Cash or better.

Step #5 – Break-even analysis

The break-even analysis helps your organization determine how much sales does it take to cover your fixed costs. The first element of this analysis is to calculate your gross margin (sales price minus variable product cost for each unit sold). The second element calculates your total fixed costs and overhead to maintain your operations. The break-even point is when the total number of widgets sold x the gross margin per product = total fixed costs.

This analysis can be done with product and service organizations. If you are interested in a free Excel calculator, please send me an email to catch@40strategy.com.

Here is a short article from Regina Bergman on the break-even analysis.

Step #6 – Short or Long-Term Pivot

Determine whether your pivot is a short-term or long-term strategic change. Some of these business trends will not last forever. For example, breweries will probably not make hand sanitizer forever. Some day, toilet paper will be readily available and extremely cheap after the hoarding stops. If you are building new capacity to enter into a new market; be thoughtful about how long the trend will last. Market research and economic forecasting are great areas to start. Stay tuned for an upcoming blog on the Toilet Paper Game.

Step #7 – Still need additional Financing?

If you still need additional financing to pivot, you may be making the wrong pivot. The Federal Funding liquidity will not continue indefinitely. Reduce your operational expense to the basic essentials and validate your strengths. Pivot into adjacent markets where your existing staff, capacity and tools can transition with minimal costs and efforts.

Ideally, new financing should not be made until you are back in a period of strength. If financing is still required to finance your pivot, look to your personal reserves first, family and friends and then outside sources. When we treat the money like it is our own, we tend to make wiser cash flow decisions in the future.

If you are interested in a free cash flow calculator, please me at catch@40strategy.com.

If you have any additional suggestions, questions, recommendations and/or best practices, please send me an email to consider them on a future blog.

Here is my Calendar Link for a 20 Minute Strategy Chat.

Links to Top Articles / Ideas / Websites

State by State Analysis to Reopen

HBR Guide to the Break-Even Analysis

100 Examples of the Pareto Principle

The Risks If Employees Refuse to Go Back To Work

Stock market link

Get Your Zoom Account

Professional Referral

Eric Haskins is the Managing Director for Jones Lang LaSalle Brokerage in Portland, Oregon. JLL is a worldwide real estate brokerage firm and they have researched the new trends with commercial real estate and returning back to the worksite. Go to this link for coronavirus trends and here is a survey. Eric’s email is Eric.Haskins@am.jll.com. Website is www.jll.com/portland.

Current Book Recommendation

Profit First by Mike Michalowicz. Excellent book for Small to Medium Sized Organizations on Managing Cash and Profits in a simpler and more effective way. Please keep in mind the concepts above are not directly from this recommended book.

Past Book Recommendations

The Hard Thing About Hard Things, Ben Horowitz

What Your Do Is Who You Are, Ben Horowitz

Born to Win, Find Your Success, Zig Ziglar and Tom Ziglar

See You at the Top, 25th Anniversary, Zig Ziglar

Extreme Ownership, Jocko Willink and Leif Babin

Predictably Irrational, Dan Ariely

Across the Board, Mark A. Pfister

Factfulness by Hans Rosling, with Ola Rosling and Anna Rosling

The 80/20 Principle by Richard Koch

Upcoming Webinars & Workshops & Free Tools

Pivoting Your Organization’s Strategy During COVID-19, Thursday, May 21st, 9AM PT, with the American Osteopathic Foundation. Here is the link to register.

Free 40 Point Checklist to Conduct Your Zoom Webinar

Free Break-Even Analysis Worksheet

Email me for a copy.

Past Webinar and Workshop Links

May 6th, 2020 – Workshop – How to Develop a 10-Week Plan to Return Your Team back to Work

April 22nd, 2020, we co-host Crisis Strategy: Successfully Pivoting Your Personal Strategy in Times of Change, with Mark A Pfister, Author of Across the Board. Here is the recording.

April 23, 2020, Vacilitation: Managing Your Team Strategically in a Virtual World, with Technology Association of Oregon

Give this a few weeks to blend into your weekly routine. If you like it, copy the article link and share it on your social sites. Send me your comments, thoughts and suggestions to improve this to catch@40strategy.com. Sign-up here!

PS – If you did not get the pre-blog email, here is the Saddle Up beginning.

Volume 2020:8