Surviving the Storm and Finding Value in the Chaos: Thoughts for the small business owner

David Rabinovitz & George W. Hightower, 3/19/2020

I write about cannabis, generally, but today I chose to write about business. Before jumping headlong into the cannabis sector several years ago, I was employed in the management consulting field providing financial advisory and strategic advice to C-level principals of privately-held firms, often in the engineering sector. In the spring of 2016, I met the Love-of-My-Life judging a business plan competition at my (MBA) alma mater, Babson. As the judges went around the room introducing themselves, I quickly explained the boring financial stuff I do for engineering firms and then mentioned on the other side of the barbell, that I consult in the cannabis sector. Everyone is always intrigued about the cannabis projects; it’s a real conversation starter and that’s how I met Beautiful Beth.

However, today’s column is on business: the nuts and bolts of navigating the sort of turbulent and uncharted territory we find ourselves staring into. The idea for this column was spurred by calls with clients over the past few days who are concerned about whether they can stay afloat let alone and how they might adapt to survive the storm. One size never fits all, but the following overview might help many by simply pointing back to the basics of strategic planning.

A downturn like the one we face today creates risks, and for some, marvelous opportunities. Managing those uncertainties and surviving takes planning, not waiting to see what happens and reacting. If you lack a high-level perspective, your instinctive reactions may make sense for an isolated issue, but probably will not weave well with other decisions you’ll face. This could impact your ability to survive. Your decisions should drive to your vision and align with your plan. Anything else will simply contribute to generalized chaos.

The Grease of Commerce

Surviving the turbulence is a fundamentally matter of cash flow. Cash is the lifeblood of a business. It is the most essential ingredient of working capital and working capital is the grease that keeps a business running. Without capital to pay bills, suppliers stop supplying, employees stop coming to work, and the economic engine grinds to a halt. Assuming you are a business-to-business, business-to-government, or business-to-third party payor, you sell on credit in some form and have accounts receivable. The following discussion is not as applicable to businesses that are cash and carry – like conventional retail, consumer services, food service, or hospitality.

Business might come to a grinding halt, deals may fall apart, or orders may be delayed, but you never pay your current expenses from current sales. Today’s expenses are paid from invoices issued 30, 60, or 90-plus days ago. You fund your operations by collecting old invoices and replace those invoices with new sales. Those new sales will be collected in the future and will fund payment of future expenses.

Your first step is to forecast your cash flow and calculate how much time you have to assess and consider what to do. An air bubble in water will rise to the surface at a rate of about one foot per second. That means if you can hold your breath for 60+ seconds, you can safely ascend from 60 feet underwater. The first rule of SCUBA training is you always have time to think. The same adage applies here – the trick is estimating how much time you have and how to stretch it out.

Digging into the Numbers

Review your accounts receivable and estimate, based on customer payment history, when each invoice might be paid. If your clients are restaurants and bars, you’ll need to consider their current predicament. Model the results and allow for payment elasticity – that as time goes on, payments might slow. Build your model to easily adjust these variables. You will now have a handle on expected cash inflows.

Now let’s move onto classifying costs. Skip anything you know about fixed and variable. Dump all the MBA-speak. Focus on practicality! I often teach young engineers that costs include costs you control, costs you influence, and costs you grin and bear. Align your thinking to the circumstance.Today, we’ll focus on costs (vendors) that absolutely must be paid, should be paid, and would be good to be paid.

Vendors that absolutely must be paid provide critical services that are automatically suspended for non-payment and will materially impact the business if they are not paid.

These are things like health insurance, business insurance, and, as an example, software subscriptions that if not paid, result in service interruption.

Employees must be paid but you may be able to create some runway. Reduced workweeks (if demand drops) or temporary wage reductions (with larger cuts at the higher end exchanged for greater protection for the lower end) can help stretch payroll budgets. Asking staff to use vacation time might sound good, but it still represents a cash outflow and will not preserve shortterm liquidity. You need to adjust actual wages if demand drops and should not be afraid to survey the staff in order to understand what they believe is the most equitable solution. Maintain camaraderie: only one captain can steer the ship but setting sails and stoaking the boilers only happens by committee.

The next level of suppliers are critical items that will not be suspended automatically for non-payment but that cannot be easily replaced. These include rent and lease payments as well as primary suppliers. Payment terms can often be stretched (you’re not the only one thinking this way, that’s why you need to build payment elasticity into your collections planning). Contact these types of suppliers early and work on partial deferrals. If your rent is $20,000 per month, try to negotiate a cash payment of $10,000 with the other $10,000 deferred until business activity resumes. You’re looking for ways to extend the runway, never wait until cash is critical. You can always negotiate a deferral and decide not to take it.

Your last level of suppliers are purely “non-essential.” Think office and cleaning supplies, training & education, non-essential travel, etc. These expenses can be stretched the furthest. They are also likely the smallest items on your income statement, but in aggregate, they can help buy time. These are suppliers you use that are not critical to your customer. Think of it this way: if you make ice cream, the quality of the milk is important, but if you change carton or packing tape suppliers, the customer may not notice.

Once you have modeled this out, you will have a sense of the length of your runway – how far you can run with no new revenue. Burn that figure into your brain. Use it as a reference point for business decisions that impact cash flow. Ask yourself whether the current decision you face now will shrink or expand your runway tomorrow.

Finally, overlay a monthly break-even calculation. If your business needs $135,000 a month to pay its basic bills to keep afloat and you have enough capital to last 75 days, for each period you expect some revenue, you will be extending the runway. Follow that runway number and keep focusing on ways to extend it until we get past the worst of this outbreak.

You’ve built a business over many years, let’s not let it crumble over the next few months!

QUESTIONS FOR DAVID email him at drabinovitz@gmail.com, or connect with him on LinkedIn here..

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