The First Aid Kit
1. Financial situation
2. External ecosystem
3. Internal ecosystem
Gain control of your financial situation
You need a clear view on your company’s health. To a large extent this is determined by the financial state you were in before the crisis and the effects of the crisis on your business. During non-crisis times the financial situation is quite steady and often we get lazy in keeping a close eye on it and our financial dashboard hygiene is not where it needs to be. In a crisis the world around you changes so fast you need to have a clear dashboard because your cash is your only lifeline.
In part 1 we will give you the tools to get a better snapshot on your situation & cash flow today. Note that this is not economic or financial advice; it is a set of tools and best practices we think help in gaining understanding and control of your financial situation. We will also help you plan for different financial scenarios for the next couple of months. You can do this alone or with your team. If you find yourself in trouble doing this, ask your accountant for help.
Data that comes in handy when using our templates:
An overview of your revenues, cost and expenses
Overview of all assets and liabilities, most important cash, debts, receivables, payables and stock
The amount of money you still need to receive from your customers (already invoiced)
The amount of money you still need to pay to your suppliers (already invoiced)
Forecast of incoming supplier purchase orders
What supplier purchase orders are likely to be delivered to you over the next few months
Forecast of outgoing customer sale orders
What customer orders are likely to be sent out over the next few months
Overview of salaries
What are your labor costs during the next months’ totals and per person. What is fixed and what is variable?
We will help you to build your financial dashboard to navigate during this crisis. Key KPIs to monitor regularly are:
Money on bank accounts (liquidity)
Short term debt
The amount of short term debt you need to pay back to your banks
The difference between your financial debt and your cash position
Confirmed cash inflow
Short term confirmed inflow of cash from customers
Confirmed cash outflow
Short term outflow of cash to suppliers
Forecasted cash Inflow
Value of customer purchase orders in the pipeline with a high likelihood of closing
Forecasted cash outflow
Amount of money you foresee to spend in the next couple of weeks/months
If you want a clear view on how bad the crisis is hitting your organization it is very helpful to compile these numbers for the same period in 2019. By doing this you have a benchmark number and you will know exactly how many % you are losing compared to when you would not be in crisis.
Financial scenario planning for cost cutting
How to use: step by step
- Identify a key driver (KPI) of your company’s financial performance and profitability. It is advised to have an indicator or figure that is easily measurable and available. In most cases, the straightforward measure would be the turnover.
- Determine a trigger or level that will activate each of the scenario’s. Example: if we expect or forecast our turnover to drop by 30%, we need all actions identified for scenario 2 to be activated. If, during the course of the crisis, situation deteriorates and turnover is expected to drop further to e.g. a level that is 60% below budgeted level, we activate all actions determined for scenario 4.
- The actions and measures listed for each of the scenarios should meet the SMART principle:
Specific each of the actions should be clear and specific
Measurable the effect or savings of each action/measure should be quantifiable and measurable
Actionable specific steps should be identified to achieve the goal
Relevant goals or actions should effectively result in (short term) cost savings or optimization
Time based actions should be feasible within a short period of time
- For each action, a person or department should be appointed to drive the implementation and to be held accountable
- In order to assess the whether the listed measures and actions are sufficient, 2 more lines are added below the table:
- Starting from the company’s turnover, margin and operating expenses budget, we know what the company’s profit will be when achieving the targeted turnover. In our example, based on a budgeted turnover of € 10.000.000, a profit of € 150.000 can be achieved.
- For each of the scenario’s, a similar calculation needs to be made in order to see what the profit will be for each of the turnover levels mentioned in the scenario’s. As an example in scenario 1, with a turnover drop of 15%, we indicate that a loss of € 300.000 will be achieved, in scenario 3 a loss of € 1.200.000 etc… ( “Result before scenario implementation”).
- The savings from the implemented measures should be sufficient to cover the losses incurred in each scenario. Adding the value of actions to the forecasted result, will show you the “new” result (“Result after scenario implementation”).
Cash flow planning
In order to prepare a cash flow forecast, one should have good visibility on below indicators that will affect a company’s cash flow generating capacity:
- Customers’ average payment term
- Suppliers’ average payment term
- Average margin generated on sales
- Company’s cost structure (payroll, opex,…)
How to use: step by step
A company’s cash flow statement is composed of elements generating cash (“Cash Inflow”) and elements burning cash (“Cash Outflow”) over a specific period of time. A cash flow calculation can be done on a weekly, monthly, quarterly or even annual basis. In times of crisis, the maximum advisable period would be monthly.
Operating cash inflow
- Estimate the company’s turnover for the specific period
- Depending on the average customer’s payment term, one can calculate how the accounts receivable (A/R) balance would change:
- Increase in A/R means the turnover exceeds the customer payments in that period, hence reducing cash generation (-)
- Decrease in A/R means incoming payments exceed the period’s turnover figure, hence generating cash (+)
- In our table above, we assumed customer pay on average 30 days after invoice date, hence in period 3, customers paid for period 2 turnover of € 150.000 while the company generated new turnover of €100.000 (which will only be paid after 30 days), hence the net effect on A/R is €50.000 of cash generation
Non-Operating cash inflow
- This is generally all non-core business related income such as insurance compensations, subsidies,…
Operating cash Outflow
- Operating cash outflow is the result of all the company’s expenses in each specific period of time. Certain expenses are due and payable within each month (e.g. payroll, rent, insurances,…). Other items, such as cost of goods, can be subject to payment terms and inventory risk, and are therefore not necessarily due within the same period, hence causing changes in Accounts Payable (A/P) balances:
- Increase in A/P means supplier payments are less than purchases, hence generating cash
- Decrease in A/P means supplier payments are exceeding purchase values, causing cash outflow
- Increase in inventory means goods are being paid for but not yet sold
- Decrease in inventory means goods are taken out of stock to generate sales and cash
Cash flow from investing
- Reflects all payments (planned) for capital investments
Cash flow from Financing
- Reflects all payments due for any loan repayments
The goal of preparing a cash flow statement is clear: how much cash will the company burn or generate and how does this affect the company’s net debt levels in view of the bank facilities that are available?
This is shown at the bottom of the table: each period’s cash flow is added to the previous period’s cash balance and will trigger an increase or decrease in net debt. This position can then be tracked and evaluated in view of the bank facilities.
Understanding the cash flow statement, will show you the key elements to increase your cash flow:
- Shorten your customer payment terms or period in which you collect your receivables. Increase collection efforts and contact with customers;
- Try negotiate and extend your supplier payment terms;
- Reduce your inventory: goods already paid for can be sold and generate cash rather than being stocked in your warehouse;
- Restrict or cancel planned capital investments that are not critical;
- Evaluate or negotiate loan repayments with your bank and try extend due dates where possible
Financial & Sales KPIs
A good way of tracking the company’s performance and financial situation is by setting up a Key Performance Indicator dashboard. This does not require specific financial software and can simply be set up as an excel spreadsheet. Example below, where we track the most important working capital components (in comparison to previous financial year) while keeping an eye on the company’s cash position and remaining bank facilities:
In addition, a specific dashboard can be created to track turnover for scenario triggering:
How to secure bank or government supported bank loans from the bank
Don’t be shy to ask for financial help. During the first phases of the crisis, loans will be necessary for almost all organizations to cover cash flow needs. Banks understand that these are exceptional times. Have a good restructuring plan ready, don’t simply expect a handout from the bank.
Step 1: Be transparent with your account managers, treat them as partners
Step 2: Ensure you can present good clean up to date financial data, if it’s not available get it available and quickly
Step 3: Demonstrate how you were tracking financial metrics before the corona disease affected your business sales and finance. Show them you were a healthy organization before all of this.
Step 4: Show them by lead indicators how the crisis has or will impact your business: drop in order intake, billing, drying up of quotation pipeline, customers cancelling contracts, customers not paying, lockdowns, business closure, etc.
Step 5: Show them holistically how you are handling the crisis as an organization. Give them a general overview of business activity, strong commercial initiatives (digital or marketing, etc.). Make sure they understand your restructuring plans, not only your financial plans. Demonstrate the actions you have taken to survive the crisis.
Step 6: Be very precise on what amount you need to overcome your financial needs. Demonstrate clearly what the root cause of your cash flow issues are or will be. Understand that loans need to be paid back and your plans & forecasts should demonstrate that your medium term cash flow can start to do this.
Gain control of your external ecosystem: customers & suppliers
Communicate as partners
You, your customers and your suppliers are in this boat together. This means you become partners in times of crisis instead of buyers and sellers. The whole value chain needs to stabilize in order for any business to be done. You cannot do this on your own.
You can become a leader in your own ecosystem by keeping the communication lines open and be the first one to come with a clear plan to guarantee continuity. Communicate proactively and give an honest outlook on how your company is reacting to the crisis. Have an outlook for the next 3 months, and remember this is continuously evolving. You need to give your customers the confidence your continuity is being guaranteed. You need to give your supplier the confidence you will keep ordering, even if the amounts will be reduced dramatically in the short term. It is our belief that companies who take the necessary measures and work together on a future strategy during this challenging period will come out of the crisis stronger than before.
Food for your financial dashboard
Customer mapping – for all B2B companies
Step 1: map your confirmed orders per customer
Step 2: verify with these customers what their liquidity is and if they will be able to pay. If your customers have difficulties to pay for confirmed orders or past deliveries due to cash issues proactively propose a payment plan.
Step 3: try to establish a forecast with your customers of orders coming in for the foreseeable future. This might feel awkward but remember you are partners to keep the value chain stable, they are also looking for reassurance products will be available in the future. This is very difficult but one needs something to work towards. Be realistic
As a pure B2C company you can communicate with your customers on the status of confirmed orders but it is very hard to do forecasting since you do not have direct communication lines with future customers.
Supplier mapping – for all companies who sell products
Step 1: Ask your supplier to give you a status on all open purchase orders. (1) Not Started (2) In production (3) Ready.
- All purchase orders with production status “Not started”, have an open dialog with your suppliers on how to manage this
- All purchase orders with production status “Not started” and urgent back orders against it, you need to make sure you only order the minimum amount needed.
- All purchase orders with production status “Ready” and “In production” and urgent back orders against it, ship the goods.
- All purchase orders with production status “Ready” and “In production”, have an open dialog with your supplier how to manage the shipping schedules and payment plans
Step 2: If you will have difficulty paying your suppliers because of liquidity, propose new payment plans yourself and don’t wait it out. Providing them with a forecast of payments will help them get more insight in their financial situation as well.
Step 3: Discuss your need for products in the foreseeable future with your suppliers so they have a outlook on what product orders might come. We suggest to forecast on a customer level first and then mirror it to assess your need for products from your suppliers.
Service companies also have suppliers and subcontractors. You can have similar steps but instead of products you have ‘time’ or ‘resources’ you purchase from them.
Gain control of your internal ecosystem: Staff & Operations
Communicate an outlook on the future to your staff
If there was ever a time for an honest truth it is now. Your staff needs to know where the organization stands in this crisis and how they and their jobs are affected in consequence. Make sure next to creating urgency you make them understand there will be a life after the crisis. If you stick together and get through this, you will come out stronger on the other end.
Step 1: Get alignment.
Make sure everyone in your organization understands what is happening and what are the business consequences of the health crisis. Follow up both the national and international situation with your management team, and share research and analysis on the topic so you can build a common understanding, vocabulary and outlook. The latter are important to communicate consistently through different channels on different occasions.
Step 2: Contextualize actions.
Many actions will be taken in the organization to stay strong: cost cutting, people put on (temporary/government) unemployment, budget freezes, … Your staff needs context. Both the staff that remains and the staff that is (temporarily) let go. Try to build a timeline of things that happened & decisions that have been made to give a transparent and chronological series of thoughts so they understand why you are taking the action which you did.
Step 3: Activation.
You are in this together. There are a lot of unusual projects and actions that need to be kick started. Ask your staff to participate actively and combine all the brainpower and willpower to get things done quickly and effectively. Communication is a two-way street. Listen to ideas that come from the bottom up and empower people. As a leader you will not be able to do this on your own.
Step 4: Keep everybody in the loop.
Communication is not a one time thing you do at the beginning of the crisis. It is very important you communicate on a regular (we suggest weekly) basis to inform everybody how the situation is evolving. You and your management team get new input every day and assess how it affects your forecasts and action plan. Communicate changes quickly and re-contextualize new actions.
Governments all over the world are putting support measures in place to help companies stay in business and to help them keep staff on board. Obtain a very good understanding of these measures in your country and how to benefit from them. Don’t let sloppiness get in the way of your company’s future. You and your staff will need all the financial support you can get. Don’t leave money on the table.
This crisis has forced a lot of us to work from home. For many organisations this is new and not a lot of processes and tools are in place yet. We believe remote working will remain a substantial part of our future even after the health crisis and the social distancing measures are over. Put an infrastructure and way of working in place to support this structurally.
Step 1: Tools:
Map your remote working needs and the (lightweight) tools that can help you. Examples below of tools accessible for everyone.
- Video conferencing: Microsoft Teams, Zoom.com, Google Meet,…
- Remote collaboration on projects: monday.com, notion.so, Office 365, Google Suite, Miro.com
- File sharing: Microsoft OneDrive, Dropbox.com, Google Drive,…
- Team chatting: Microsoft Teams, Slack.com, ….
- You can find a good overview of multiple tools here.
Step 2: Bring structure:
Make sure you bring some structure to guide your staff while working remotely, certainly if they are not used to it. This can best be done by the project leader or department head to fine-tune them to the needs of individuals. Next to ad hoc calls, try to have regular touchpoints with your direct team to bring structure to the day. We suggest:
- Morning Team Call: Start the day with a team call to go over the tasks that need to happen during that day. Make sure everybody asks questions to compile their to do list of the day.
- After lunch update: Do a short call after lunch with the team to make sure everything within your direct team runs as planned.
- Victory Call: At the end of the day you could have a short team call to sync the status of the projects you all worked on during the day and to celebrate small wins. Keep the spirit up, and bring in some humor!
- Individual call: Not everybody dares to speak up during a call with the full team. In order to make sure everybody stays connected, have a call or keep on communicating with everybody individually to check how they are doing and coping with the situation. Try to balance the different types of energy with and towards all colleagues: structure, action, vision and caring.
Cross Departmental Agility
Unusual times call for unusual measures. You will have to balance your resources across your departments, both human and financial.
Step 1: Mapping:
Make a sheet with 3 columns:
- Departments/teams of which the intensity of work will decrease the next weeks or months
- Departments/teams of which the intensity of work will increase the next weeks or months
- Departments/teams of which the intensity of work will stay the same the next weeks or months
Step 2: Transfers:
Drill down into the teams and look for team members in the decrease column that you think are agile enough to do other work than they do today. Look for a match in one of the teams in the increase column. Do this until you have the feeling your human resources are balanced for the near future. Do the same for your financial resources. Evaluate this list regularly since things can change very fast.
Step 3: Initiate:
Talk to all teams and team members involved and get their input on your proposition. Roll out the transfers as quickly as possible.
Admin & Legal
We will not dive deeper on this topic since this is very specific to your country, industry and company. Make sure your actions do not cause legal issues down the line, even if they had the best intentions.
Keeping your company afloat, securing jobs, managing customers and suppliers is already an enormous task, we know. Would it be possible for you to go even further and help society as well? We believe you can! Start small and start in your own communities. What can you and your organization do to help others?
Stay up to date!
Don’t wait for others to come and help you. This is not a drill. This is the first global crisis of this magnitude for your staff, customers, suppliers, banks and governments. Take the lead and design your own destiny. Don’t forget to help others, you are in this together.