Managing Cash Flow In a Crisis- 10 Things To Do Right Now
As a former bankruptcy law specialist and commercial litigator, I have worked with thousands of individuals and businesses to help them manage revenue shortfalls, deal with creditor issues, and recover payments during financially challenging times. During my years practicing debtor-creditor law, I observed that many people fail to “think properly” about how to handle financial downturns and often find themselves thrashing around in the dark, despite the fact that there are a number of simple and effective methods for managing cash flow that produce results. Between the cannabis shakeout that started in the third quarter of 2019 and the Covid-19 pandemic currently crushing the world economy, I thought it would be a good time to discuss these practical methods. In this post I will discuss ten things you should do right now to preserve your business.
1. Obtain credit
Obtaining a line of credit, or even a loan of a specific amount of money, can help bridge the gap between current financial insecurity and a future uptick in revenue. There are obvious disadvantages to credit, including the requirement of periodic payments, the possibility of future default if cash flow does not improve, and the likelihood of being required to sign a personal guarantee. Additionally, obtaining credit is difficult. Businesses in the hemp and CBD industry struggle almost as much as the marijuana industry to borrow money, particularly from institutional creditors, such as banks. Despite these issues, it is worth making an effort to obtain credit for smoothing out temporary cash shortfalls and paying important vendors. (More on that issue, below.) I will note that the Small Business Association (SBA) is offering disaster relief loans to qualifying businesses.
2. Organize your accounting
Many businesses have dedicated financial personnel, and their books are in tip top shape. That being said, I continue to be shocked at how many companies’ accounting practices and financial records are disorganized, and sometimes nonexistent. The days of operating a profitable business without a comprehensive accounting system and tight records are over. Admittedly, there was a short window of time when rapid growth and high profit margins in the cannabis, hemp, and CBD sectors allowed businesses to succeed despite sloppy accounting practices. Those days are over. Take the time to organize your bookkeeping and accounting system. This often means hiring a professional. (See below.)
3. Review and cut your expenses
Once your accounting system is organized you can easily create reports to see exactly how your business spends money. In my experience, there is almost always room to cut back, even with businesses that are operating on a small budget. This may include reducing redundancies, eliminating non-essential technology, consolidating and reducing physical workspaces, using less expensive inputs, temporarily reducing salaries, and identifying which aspects of your marketing campaigns produce measurable returns to avoid overspending on ones that do not.
4. Create realistic cash flow forecasts
Another benefit of organizing your accounting is the ability to review accurate revenue reports in order to make reasonable predictions of future revenue. Admittedly, making cash flow forecasts in the present economic environment is particularly challenging. However, merely going through the exercise helps create realistic, if sometimes dire, expectations and can help you gain a better understanding of seasonal cycles and movements in your market.
5. Prioritize your payments
Emotions and fear often drive how people choose to pay their financial obligations during times of stress. Unfortunately, this often leads to wrong decisions. For example, when I was practicing bankruptcy law I was amazed at how often people would forego their mortgage payments in order to remain current on credit card payments, despite the fact that failing to pay a mortgage usually results in foreclosure while failing to make credit card payments does not. This was almost always the result of fear-based financial planning. Since mortgage companies can usually get repaid by selling a defaulting debtor’s home in foreclosure, they do not usually resort to threatening calls and letters. On the other hand, credit cards and other unsecured creditors (ie, lenders who are not secured by collateral) often use strong-arm tactics, including persistent phone calls, nasty letters, and even outright threats, to persuade people to pay them. They use these tactics because they do not have the same level of recourse as a lender with a lien on a home or vehicle. If your business does not have sufficient funds to pay all creditors in full, then you will have to choose which ones to pay. This assessment should be based on a number of factors, the most important of which include how quickly nonpayment to a particular creditor can result in damage to your company. This is not necessarily the creditor that “barks” the loudest.
6. Negotiate favorable credit terms with your vendors- leases, suppliers, creditors
This is crucial. Often, vendors would prefer to grant temporary favorable terms to a struggling business rather than risk default and/or losing the account altogether. In the current economic environment, creditors are often willing to accept partial payments, extend payment terms, reduce interest rates, and make other adjustments to payment terms. For example, if rent payments are consuming most of your revenue then ask your landlord for an abatement to be repaid in the future. If your rental terms were negotiated during a time of abundance, then perhaps renegotiating the lease to reflect anticipated future revenue (see above) is possible. In short, do not hesitate to contact your vendors and propose modified payment terms. Although some will not budge, it is likely that you will be able to get some relief. To that point, remember that your vendors may also be navigating difficult economic circumstances and so, to the extent possible, propose “win-win” solutions. A vendor may agree to accept prompt payments of a lesser amount, rather than dragged-out payments of the contracted amount, in order to consolidate its financial position.
7. Invoice quickly and offer incentives for prompt payment
You will rarely receive payment without sending an invoice. If you have already provided a service and/or made a sale, then make it a priority to send an invoice. Given that most businesses are struggling with cash flow right now, it may be more beneficial to accept a prompt reduced payment than to hold out for a full payment. To that end, offer incentives to quick payment. When cash flow is tight, it is often more important to get paid a lesser amount now than a larger amount later. This is particularly true during times of global financial stress when the company that owes you money may not survive long enough to come up with the full amount.
8. Focus on marketing and developing new business
It is challenging to generate new business in a down economy. It is difficult to allocate limited resources to marketing campaigns and developing new business. Yet now is the time to create, or even preserve, market share. Your competitors will either fail, leaving you on top when good times return, or they will succeed, leaving you with a smaller piece of the pie. Either way, and despite slim revenue and deepening financial stress, it is vital that you focus on growth. This does not necessarily mean a “shotgun” or “see what sticks” marketing approach. (See “Review and Cut Your Expenses”, above.) Rather, cut out weak selling product lines and focus on promoting the popular ones through targeted campaigns. Research and conduct studies to see where your market is going, then apply your resources accordingly.
9. Sell unnecessary assets
If your business owns assets that are underused and are not necessary to produce revenue, then you should consider selling them. If the goal is to survive a cash flow crunch, then liquidating unnecessary assets can be the difference between surviving or failing. It is better to sell an asset now and use the cash to keep your business afloat than to hold on to it and risk it being liquidated down the road if the business fails. Of course, this presupposes a sober analysis of what assets you need in order to to determine which ones can be sold without undermining the business. Do not be shortsighted, but be willing to part with favored assets that are not generating revenue.
10. Consult with professionals- attorneys, CPAs, and other financial experts
While this may appear to be self-serving, I can assure you that revenue spent on hiring an experienced professional to help with some, or even all, of the above is money well spent. Your circumstances may require help with accounting, taxes, legal issues, or some combination. Take the time to determine what type of professional(s) you need, get references from trusted sources, do online research, and pull the trigger. It may be the difference between surviving the current crisis and being swept away in it.
March 21, 2020
Rod Kight is an international cannabis and hemp attorney. He speaks at cannabis conferences across the country, drafts and presents cannabis legislation to foreign governments, is regularly quoted on cannabis matters in the media, and maintains the Kight on Cannabis legal blog, where he discusses legal issues affecting the cannabis industry. Rod also has extensive experience representing clients through periods of financial distress. You can contact him here.