Chapter 9 -
Handling cash emergencies

If you have skipped to this chapter, we assume you have an imminent cash crisis and need immediate action to keep the fleet rolling. Although long-term success at cash flow management requires slow and steady steps to build and maintain your cash flow engine, there are ways to buy time so that you can begin that process.
The steps to a business turnaround are:

1. Create a “recovery team” to get hard facts, admit mistakes and set your strategy. Involve top company employees and outside advisors.
   
2. Identify your key stakeholders – partners both inside and outside of the business – and plan on a coordinated strategy for each. Consider bankers, other lenders, key customers, employees and your family.
   
3. Prepare a concise, written plan of recovery, identifying the overall picture and what you need to ask of each party as part of the recovery. Make sure a single individual is accountable for each project.
   
4. Approach each stakeholder with the plan and obtain cooperation. Show them the problem, the recovery plan, your chosen solution and what you are asking. Request a commitment to your plan.
   
5. Set and keep progress reporting dates on the plan. You cannot communicate your progress too often.

Get attention
If you are the company’s financial officer, meet with the CEO about the problem and be specific. For example: “Our cash projections show us being short of what we need for this month by $X dollars, next month by $X. Our bank lines of
credit are maximized. Our A/R is that, our A/P is this. Here are some of the contributing reasons. Here is what I recommend at this point.”

If necessary, make copies of this chapter and distribute it to help guide the discussions. Eventually, create a small group of the key operating officers and key advisors to help devise and implement the recovery plan.

Get help
If you have not already involved an accountant and attorney, do so now. Sure, it’s expensive, but your company could be at stake. Don’t be penny-wise and pound-foolish. This may be the first time you have suffered this kind of crisis, but you can bet that they help dozens of businesses each year in the same situation.

Take responsibility
Although this is no time for blame, it’s critical that you and your team take responsibility for the problem – and for devising the solution. First, admit the seriousness of the situation and your role in its development. Get your management team to do the same.

Accepting responsibility is important for two reasons. First, the status quo is no longer acceptable. Big changes are necessary. Second, anyone you ask for help does not want to hear about who’s to blame. Take the advice of Hopper the grasshopper from the Disney film A Bug’s Life: “First Rule of Leadership: Everything’s your fault.”

There are probably a dozen or so reasons why you let your company get into this situation. Start by admitting them to yourself and remember how lousy this feels. That feeling will push you to be a stronger manager in the future.

Accept that recovery will take time
Your financial troubles didn’t happen overnight. It took weeks, months, maybe even years, for poor credit-check procedures, lax accounts receivables collection policies, poorly managed operations, bad financing decisions or any number of problems to get you in this mess. You will not solve it overnight.

Unless you can make major injections of personal cash, the added stress of returning to profitability and paying back borrowed money will mean lean times for a while. Brace for the long haul if you’re serious about returning to and staying in excellent financial condition.

Radiate confidence
Bankers, suppliers, customers and other lenders are only going to bet on you if they sense that you can convince them of the following:

• I know why this happened.
• I admit our mistakes.
• I can show a clear plan to avoid these mistakes.
• I have a plausible plan to return the company to profitability.
• I have a method to keep everyone constantly informed about the progress of this plan.

Sincerity is just as important as confidence. A lender will extend further credit only if he can look you in the eye and know that you’ll do what you say you will. So be sure you know you can deliver on any promises you make. If you aren’t sure, then don’t promise.

Prepare a detailed picture
Get an accurate picture of the true condition of your company. Work with your accountant to ensure that the company’s financial statements are accurate – no matter how bad it may look. You can’t afford any more surprises. Be certain that bank accounts are fully posted and reconciled.

Clean up accounts receivable listings to make sure all shipments are posted and 30-, 60- and 90-day aged-receivables listings are accurate. Ensure that every company obligation is listed on the books.

Accelerate cash receipts
Next, consider the normal cash accelerating steps detailed in Chapter 6. Recognize, however, that most of those steps won’t make much difference in the short run. The most important strategy is to collect your accounts receivables as quickly as possible.

Pore over the A/R listings. Divide major customers who owe you money into two categories: those who are strategic partners and those who aren’t. Your strategic partners are interested in your success, and you perhaps can take them into confidence about your difficulties and recovery plan. You might ask these customers for accelerated payment terms, even advances. All the rest must simply see a businesslike company that is now serious about getting paid on time.

Identify payments you can delay
Consider the payment-delaying tactics outlined in Chapter 7. Ensure that you’ve considered each one, as you can bet that lenders and customers will ask if you have. But avoid at all costs delaying any payroll tax deposits. Borrow from a loan shark before you do this. The IRS penalties are horrendous, and it’s the only loan shark with the power to levy your bank accounts.

And the fact that the IRS has done this will be public information at the local courthouse, potentially damaging your company further.

Put in more cash
Look at your personal investments in the company and consider additional cash injections through subordinated loans or capital. Lenders won’t bet on your success if you haven’t maximized your personal stake. Avoid cashing in IRAs or retirement plans until the last minute, however, as 50 percent or more of that money will be consumed in taxes and early withdrawal penalties.

Update your personal financial statement and take it with you to the bank. Look for personal assets that could be liquidated or pledged as security for new credit.

Taking a significant pay cut sends the strongest signal that you’re serious about this situation. Curb fringe benefits and any visible perks.

Reschedule payables
Suppliers that have a significant interest in your success may be willing to loan you money by rescheduling part of their payables. Consider asking to take all balances over 30 or 60 days and agreeing to a 12-month repayment plan on that balance. Then offer to pay all new purchases current each month and remit one-twelfth of the old balance. Be willing to sign a note with interest but ask for a no-interest note that is convertible to one with interest if you miss a payment. If you get cooperation from, for example, your main fuel supplier and tire and parts dealers, you could free up thousands of dollars to direct toward the crisis.

Review refinancing options
Take this opportunity to properly restructure your debt. Spread the risk around; each lender will insist that it isn’t shouldering an inordinate amount of your debt. Don’t be afraid to seek out a second bank. The first may be glad to share some of this lending risk. Realize, however, that you may have to pledge different assets or other personal assets to secure this new loan relationship.

Get employee and family support
Whether you have “open book” management or keep tight secrets, don’t hide the fact that you are experiencing difficult times. Your employees know, so be frank and ask for their help. It’s a perfect time to reemphasize the need for safety programs, cost-saving initiatives and productivity measures.

Your family certainly knows you’re troubled. Be frank but show leadership. Assure your spouse that you have good advisors and good employees and that you have a plan. You have asked your managers and employees to sacrifice. Now it’s time to do the same at home and rein in personal spending.

Consider bankruptcy a last resort
Forget the enticing claims of low-rent attorneys who advertise on late-night television. Don’t consider bankruptcy unless you absolutely have no other options.

The consequences of a court-supervised reorganization make other options seem much more palatable. The odds of successful emergence from bankruptcy for a small company are slim to none. And you’ll never really live it down. Just ask anyone who’s been involved in one.

Commit to long-range solutions
Surviving a serious cash flow emergency is like surviving a life-threatening accident. There will be a long recovery period, and you may need therapy or retraining. Once your financial recovery is under way, commit to developing a long-range plan so you won’t be in this situation again.

In Summary
If you discover a cash crisis, get the blame out of the way and focus on solutions. Show lenders, customers, suppliers, employees and your family that you recognize the problem and plan to solve it. Accelerate cash flow and delay payments, if possible. And show everyone that you are committed to the company by increasing your stake in a recovery through loans, new equity or reduced personal salary. Do everything you can to avoid bankruptcy.