A cash crunch does not have to kill your company

Sabah Al Binali discusses the dreaded negative cash-flow scenario.

All entrepreneurs and many executives face in their professional careers the dreaded negative cash-flow scenario.

For entrepreneurs this is a normal phase going from start-up to, hopefully, mature company. For chief executives it can happen during an economic downturn or if the company has made serious mistakes or faced a catastrophe.

The underlying mistake that these managers nearly all make is to consider cash-flow break-even as a goal.

It is, rather, a milestone. The goal, of course, is a pre-agreed return on equity (Roe). There might be many more milestones, such as cost per unit and number of customers, but Roe is the target.

The danger in negative cash flow situations is that there is an urgency to make good decisions before time, or money, runs out. This urgency creates stress and quite often panic in entrepreneurs and chief executives alike as they scramble to manage a completely unfamiliar situation.

The sad result is a wannabe leader destroying his company in panic before abandoning it to its fate, having done too little to matter but leaving it too late to allow a more suitable candidate to turn things around.

The absolute first step in any negative cash-flow situation is to stop deluding yourself, your employees, your board and your shareholders.

Stop trumpeting profit when cash-flow is negative. Stop hiding behind non-recurring operational cash flow. Most of all, stop believing that some repeatedly unsuccessful business line will miraculously generate cash flow in the near future, let alone enough cash flow to save the company.

The second step, and this is vital, is to focus on revenue. It is an amateur mistake to believe that cost-cutting is the priority for cash-flow negative companies.

If you do not understand where your future revenues are going to come from, how do you know what to cut? Think of it this way: if a surgeon needed to operate on you in an emergency, would you want him to just dive in and start cutting or would you prefer that he diagnosed you first to understand what would keep you alive and protect you at all cost?

The trap in forecasting revenue in a cash-flow negative company is assuming that the current product and service portfolio will become profitable again. A brutally honest assessment of what works and what new product development is needed has to be performed. Sitting month to month and quarter to quarter making excuses as to why the same old tired products and services have failed to work is simply corporate suicide. Stop wasting shareholder money.

Once you have an idea of how the business might create sustainable positive cash flows you can then begin to look at costs. Doing it the other way around leads to great short to medium-term performance improvements, but you will lose all ability to generate meaningful future cash flow.

Do not be too fearful of cutting less than you need to in the hope that things might turn around. Otherwise you will only create a cynical corporate culture that sooner or later leads to much of the best talent leaving, and thus fuelling the downwards spiral of the company. Any talent left is there only because of misplaced loyalty or difficult economic times.

At this point, the savvy entrepreneur or chief executive will have a good turnaround plan that they can execute. This is also the time to formulate a funding plan. Funding, whether through an equity investor, bank debt or other avenue is not easy, and yet far too many entrepreneurs or chief executives have made the mistake that they can simply waltz into an investor’s office or a bank and get an investment or loan based on charm or charisma. They nearly always fail miserably, which adds to their panic.

Instead, think long term, plan for funding early and build a robust and above all realistic business case.

The way that most entrepreneurs and chief executives manage a negative cash-flow scenario is to misrepresent the situation to their employees, board and shareholders and then to gain breathing room by irresponsible cost-cutting. There is a better way – and that is to trust your stakeholders to support you and to plan properly.

Sabah Al Binali is an active investor and entrepreneurial leader, with a track record of financing, building and growing companies in the Mena region. You can read more of his thoughts at al-binali.com