NECP on How to Survive the Pandemic of 2020
For small and mid-sized businesses, survival is all about cash flow.
Tom Desmond, Managing Partner of New England Consulting Partners, knows that for small and middle-market family businesses to survive, consistent cash flow is essential. It doesn’t have to be plentiful, but it must be steady without any starts and stops.
The fact is most cash flows rely on the 90/10 rule: 90% of purchases and sales are with 10% of suppliers or customers. (If it is not the 90/10 rule, then it is certainly the 80/20 rule.) The dependency has become even more fragile during the current crisis because if one supplier or customer is hurting, chances are the others are, too. The domino effect can be swift and cataclysmic as cash flow dries to a trickle or ceases altogether. That’s why the biggest enemy of consistent cash flow is a “shut down” scenario like we’re in now. Especially if a company was operating at, or close to profitability before this crisis hit.
At the heart of the problem is a vicious cycle of cash flow crunch. Cash flow is slowed by longer order and payment cycles caused by, you guessed it, lack of cash flow. An order that takes six weeks to turn into cash will now likely take twice that long. In the meantime, companies must cover overhead, pay employees and purchase additional raw materials.
As each day passes the working capital requirements to restart the economy will become greater. Many businesses will need to revert to “startup mode” and will require either an equity infusion or a significant loan.
Meanwhile, as owners, banks and equity sponsors recalibrate and begin to restart businesses, they must watch cash more carefully than ever before and monitor the credit function with added scrutiny. For example, qualifying a new customer’s credit-worthiness takes on far greater importance. How do you even measure it? For starters, you better understand the customer’s industry as well as the impact and implications of the shutdown on their vendor supply chain.
There remains a lot of uncertainty about what will happen going forward, but one thing you can count on. Surviving the crisis will depend on accurate and meticulous cash flow forecasting and management that will require a more sophisticated and deeper set of cash management knowhow and skills than ever before.