Count Your Cash Right Now
For any business—and especially a small business, nonprofit, or independent freelancer—cash is your financial lifeblood. Cash is still king.
According to the U.S. Small Business Administration (SBA), about 600,000 new small businesses are launched every year. But only two-thirds survive two years. Fewer than half last four years. And fewer than one-third make it seven.
The two biggest causes of small-business failure? Inability to attract enough customers to generate sufficient sales, and inability to generate enough cash flow to sustain the business.
First things first: Count your cash.
What is the cash balance for your business right now? What do you estimate it will be in one, three, six months? These are numbers you need to know. Free cash-flow worksheets are available from the SBA and other websites, and of course included in QuickBooks.
Now that you know your cash reality, turn your attention to improving your cash flow and increasing available cash...and building cash reserves.
Do you have any unused or underused assets you could sell and turn into cash?
Have you engaged with your suppliers to negotiate lower prices or better payment terms?
Have you taken a hard look at your information systems? Both internal and external? With customers, employees and other important stakeholders?
This is an area often neglected completely by small operations, or else consisting of cobbled-together, ineffective, or inefficient legacy systems. It’s also an area benefiting from constant innovation, continuous improvement, lower costs, and better business value.
There are IT service providers available to give you a free or low-cost assessment of your current system and help you explore smarter electronic customer relationship management (CRM), invoicing, payments, payroll, etc., to support your business better and at lower cost. You may conclude that you don’t need this capability or that the cost isn’t worth the benefit. But why not explore the possibilities?
And, of course, have you looked at all possibilities for increasing customers/sales or reducing costs, both of which can contribute importantly to better cash flow?
Finally, if you finance some or most of your business, then make the time to talk with your funding sources about your outlook, expectations, and needs. Local community banks did a much better job than regional or national banks with the SBA’s PPP program (which I hope your business or nonprofit was able to take advantage of). These community banks are not only a source of cash and financing at often better terms, but they are also a resource that can connect you and your business to other useful resources in your community.
A.G.’s perspective: Sleepless in Vienna
The most traumatic threat to the financial lifeblood of our business at P&G occurred in 2008-09, during the global financial crisis and recession. I had just checked into a hotel in Vienna after spending a week in Russia and eastern Europe reviewing P&G businesses there. I turned on the TV to catch up on the news, only to learn about the Lehman Bros. bankruptcy in real time—still the largest bankruptcy in world history.
Almost immediately, I went into action. I was on the phone most of the night literally reversing our goals, strategies, and plans for the fiscal year, which had just begun July 1, 2008.
We pivoted 180 degrees away from a “deliver the decade” growth strategy and operating plan to a conserve cash and reduce costs ASAP action plan. We turned on a dime and walked away from going for an eighth-straight double-digit annual increase in earnings and earnings-per-share growth. This was gut-wrenching for a management team and a global organization that had just delivered its record seventh year in a row, the most consecutive years of double-digit growth in the company’s 170-plus-year history!
We didn’t change course a moment too soon. Over the next nine and a half months, we would absorb over $4 billion of increases in commodity costs and negative foreign currency charges. That was the biggest cost headwind the company ever faced in a single year by far.
The organization did an amazing job given the volatility, uncertainty, and difficulty of the circumstances. While organic sales grew only 2% in 2008-09, earnings per share were up 8% behind a balanced management of pricing, mix, and cost savings. The smart management of capital expenditures, receivables, and payables enabled continuing strong cash flow. In fact, from 2000 to 2010, the company increased its operating cash flow from $3 billion to $13 billion a year—a four-fold increase at a time when sales doubled. This increasingly robust flow of cash from the operating businesses enabled not only strong continuing investment in company growth and value creation opportunities, but also strong steady returns to share owners in the form of dividends and share repurchases.
About the author
A.G. Lafley is the former CEO of Procter and Gamble, who worked for decades in and with large public companies. Over the last 15 years, he has turned more of his attention, energy, and time to small businesses and nonprofit organizations. He currently serves on the boards of Omeza, Snapchat, Tulco, Hamilton College, and as the founding CEO of the Sarasota Bay Park Conservancy. A.G. is the author of two best-selling books, The Game Changer about innovation and Playing to Win about strategy, as well as numerous articles on leadership, management, and business strategy for Harvard Business Review.