I don’t know about you, but if I hear another talking head on the TV using the phrase “new normal,” or read another newspaper article or blog post that suggests that anyone truly knows how business will change in the medium to long-term, I think I will explode. I plan to just build on my previous post on cash management and on the need to scenario plan as you continue to focus on cash-flow, which you and I both know is the lifeblood of every business.
Being too slow to cash is fatal for any business, and in the last two months most of you reading this will have already acted deliberately and quickly to take the necessary tactical steps to adapt your working capital, business expenses, and other cash outflows to be closer aligned with reduced short-term revenues and uncertainty around the immediate future, either to ensure the survival of your business, or as a sensible precaution during this national (and international) emergency. For many business owners, executive managers, and their employees, this was a very difficult time and required some tough decisions and sacrifice.
But as states begin to emerge from “lock-down” and you consider how you might ramp your business back up, you are probably coming to the conclusion that the next few months will be no less uncertain, and that navigating decision making in this (hopefully interim) environment may actually be even more difficult than what you had to go through during your initial pandemic response.
Therefore, let me offer up a few key things for you to consider as you try to model your cash projections for the rest of 2020 and beyond, and consider potential scenarios you may well face:
#1 Are you going to undertake M&A activity?
No judgement here: there may be a lot of good candidates for mergers or acquisitions at far lower prices than a few months ago that may represent good returns on investment and boost your top and/or bottom lines, or your current business situation might make you a good merger or acquisition target, or make you more open to merging or selling.
Outside of our typical cautions on the challenges of due-diligence and pre and post-merger integration, and of actually achieving projected synergies (meaning you will likely benefit from external help), you will need to factor M&A into your cash equations if it is potentially on the horizon. It might also be prudent to check in on your current and future potential credit lines, borrowing ability, and lending rates you might be able to achieve, bearing in mind that banks are starting to be more watchful in these areas, and have already factored large, pandemic related write-downs to their business loan portfolios in expectation of higher rates of business failure.
#2 Has the impact of changed Marketing Investment and Capex assumptions and budgets been reflected in other key assumptions?
If you have already made changes (i.e. reduced) your projected marketing spend or capital expenditures to manage cash flow, you have probably already captured the high-order effects of these changes in your cash position projections. However, you probably have not yet had the time to look at how these changes have affected other assumptions that have the previous capital expenditures embedded within them, such as Sales Growth, Cost of Goods, and Gross Margin.
If previously planned (but now cancelled or deferred) marketing spend or capital expenditures drove assumptions in the maintenance or achievement of positive improvements to your production or operational efficiency that then translated into top and/or bottom-line impacts in your original projections (and let’s assume they did, otherwise why were you planning to spend this money?), “backing-out” these embedded effects from your new projections to see how this affects your cash position might be a worthwhile exercise. This may well cause you to reassess your current best thinking on which projects to stop, slow, or carry on with, as you consider the strategic impacts, both internally and on your competitive situation, of your initial tactical moves to conserve cash.
#3 What if? (also known as “What else could go wrong”?)
In order to make future financial projections you will need to make assumptions (Like you haven’t already) on how key expense and revenue variables will grow and change as lockdowns begin to subside.
No doubt, these assumptions will be based on complex interrelationships across myriad factors, from the obvious (such as customer demand, pricing, and supply chain issues and changes) to the harder to predict or more intangible (such as oil prices, when a Covid-19 vaccine will be available, the strength of the economy in the meantime, etc.), and across multiple stakeholders (such as employees, business partners, regulators, your local communities etc.).
Therefore, the opportunity to arrive at imperfect assumptions is high, without even considering “what else could go wrong” (i.e. other “black-swan” type events).
So spend some time, or consider getting some outside help (from Core Catalysts of course) to model a few potential scenarios or “what-ifs,” such as:
- What if revenue rebounding takes twice as long as projected?
- What if revenue only returns to 50% / 75% / 90% of what it was before?
- What if raw materials inputs and supply chain prices stay where they are (versus where they were) or were to increase 5% / 10% / 15%?
Projecting the impacts of these and similar scenarios on the financial health of your business and considering the odds that any, a combination, or all of these might happen will give you a sense of the medium to long-term risks that you may be facing, and help you to determine, change, or optimize your cash management strategy in the near or ongoing term.
While certainly not easy, planning for and considering these three factors can position your company to emerge stronger and as soon as possible from the pandemic, with the capability to continue to make both strategic and opportunistic investments. If you think you might benefit from assistance in refining your post-lockdown cash management strategy, give us a call to see if we might be able to help you!
– Mark Jacobs, Client Service & Delivery