Mar 23, 2020
Five tips for entrepreneurs to manage their cash during this crisis
An interview with veteran financial expert David Frodsham
I’ve known David Frodsham a long time, as we belong to the CEO-Collaborative Forum, a senior executive and entrepreneurs’ community and live collaborative platform for business leadership and growth; their mission is taking companies to the next level and connect international CEOs who faced similar challenges, and to give them the opportunity to learn and grow from each other.
David is a finance whiz! He serves as Managing Partner of Little Venice Partners, a London-based corporate finance boutique. He specializes in financial strategy for international growth, is a visiting professor at IESE Business School and has written a book on entrepreneurial finance, “Getting Between the Balance Sheets”. This interview was arranged thanks to CEO-CF.
Entrepreneurs are Worried
So, we find ourselves in the midst of a global crisis with nowhere to hide! We were fairly blindsided by it, relatively speaking, and this has spiraled from a ‘local foreign problem’ to a ‘global pandemic’ very rapidly, leaving everyone very little time to prepare. As an entrepreneur, you’re probably trying to steer the business towards new fundraising rounds with investors and pilots and sales to customers. Suddenly you’re hit with a fundamental and existential threat. Over the last few days, I’ve spoken to several of my fellow entrepreneurs around Europe, and panic levels are coming to a sharp crescendo. What do we do? how do we manage the business? the decisions for an entrepreneur during normal conditions are under time and money pressure anyway, so how do you steer your business in a once-in-a-century black swan event? Business school certainly didn’t prepare you for this.
That’s why we decided to interview David
Since David has a wealth of experience across both the UK and the rest of Europe (he also does deals in the US and Asia, by the way), we decided to request an hour of his time to interview him and get his take on some of the key questions that entrepreneurs are asking. Read the interview in the section below.
Setting the Context
Deep: What does an entrepreneur do to get him/herself in gear to face such a crisis, in general terms?
David: Firstly, be committed to get through it. Second, look to lower your risk; your risk positioning. At the same time, don’t panic. So, the lowering of risk means probably a slowing down of investments. It means being cautious about what you’re doing, about the customers and suppliers who you’re working with and how exposed you are to them. Don’t be fearful because you can really only make good decisions when you’ve got a clear head.
Deep: How long (in your opinion) is the time frame an entrepreneur should be looking at for such a crisis? (weeks, months?)
David: Well, I think this crisis, everyone is saying it’s going to be a minimum of another quarter, so until the end of June at the earliest. In conversations on the news today in the UK that it’s really actually going to take another year, till the summer of next year. But that’s what I was saying: you have to make your business sustainable because you just don’t know how long this is going to last. The worst thing to do is to say, “ I’ve got some cash; I’ll just grit my teeth and make losses and I’ll see myself out the other side,” because you don’t know where the other side is.
Deep: Do you think the government promises of intervention and support will be meaningful for entrepreneurs?
David: If someone offers you money, you should take it, but I don’t think you should rely on it. So for example, this could be a very good time to take on a large amount of debt because money is so cheap at the moment, but at the same time, don’t spend it, keep it as a buffer. Be very careful with it so that when the tide turns, you can still pay it back.
At the moment, because no one knows how long it’s going to last, it’s more about trying to keep companies afloat. The government might lend you some money, but that doesn’t really help you because you’re still unprofitable and you’ll just take you on debt that you as ultimately going to have to pay back. We’re seeing things like land commercial landlords not be able to evict tenants from offices for nonpayment of rent. But ultimately you’re still going to have to pay it or you’re going to go bust. So, I think we may see some kind of universal basic income. I think it’s more likely than the bailing out of industries.
Deep: See, that’s kind of counter intuitive because in a crisis you wouldn’t think of going more into debt because of the risk. But under what conditions would you encourage an entrepreneur to take debt?
David: Well, I’d consider the security of suppliers. If you have a supplier who’s important to you but has short term cash flow problems and you can help them by paying them a little bit earlier, why would you not use debt for that? What I’m very strongly advocating against is funding losses through debt. I was thinking of net working capital and having a cash buffer being where you may want to consider taking out a loan.
So how should the entrepreneur manage their cash?
Deep: I’ve spoken with a few entrepreneurs during the last week or so, and they are somewhat lost as to what to do and how to spend their time and money — I would assume one of the key weapons in their arsenal is the wise allocation of cash — what are the top 5 tips that you would advise as to how best to manage cash during this difficult period?
David:
“First: Understanding of what cash is needed for is a great starting point”
Companies only need cash for four reasons and there are no exceptions to this:
- Firstly, they need it to fund losses. If a company is unprofitable, losses will eventually transfer into cash.
- Secondly, for capital investments, to buy a machine or factory or other company, or whatever.
- Thirdly, it’s net working capital, which is the change of the terms with its customers, suppliers or an increase in business, which results in a change in net working capital.
- And lastly, it is to have a cash buffer, just to be able to have a reserve.
There are only those four — I’ve ignored here things like dividends and share buy backs and the kind of equity side of it. So, it’s important to understand, for each of these how in a crisis your world might change. Are you going to be pushed into losses? Are you going to be more efficient by buying some capital equipment? Are you going to maybe generate some cash by having a low level of business and therefore needing less working capital? Or are you going to sensibly perhaps have a larger cash buffer? So I think just that understanding of what cash is needed for is a great starting point.
“Second: This is the time to strengthen relationships”
Reinforce relationships with suppliers and customers and be close to both of them. What this means from a cash perspective could be if you have an important but weak supplier. You probably want to pay them more quickly than usual. If you have a very good relationship with an important customer or client, perhaps they can be encouraged to pay you more quickly. So, from a cash perspective, those are things you can play with. But also it is a question of sending the message to your suppliers and to your customers that you are determined to remain in business throughout this crisis.
“Third: you need to make your business sustainable — and you need to believe that it is sustainable”
You have to make the business sustainable because we don’t know how long this crisis is going to last. And that means that if the company has been pushed into being unprofitable, you have to take action to make the company sustainable as quickly as possible. In order to do this, you need to abstract up from the view of your own business to the view of the ecosystem around your business. It’s not just about you surviving at the expense of your suppliers or customers (i.e. a zero-sum-game) — it is only in collaboration with them that you will survive. It will mean that you be transparent and communicate openly with both parties — be honest and clear with your strongest and weakest suppliers about how you will pay them and the same with your strongest and weakest customers, about how you will invoice them and renegotiate terms for the interim duration of this crisis. You don’t want to come out of a crisis period after hunkering down and only focusing on your own business, only to find that you have no suppliers or customers.
That’s kind of the foundation of what my recommendation is. So we are going to call our key customers, and let them know that we are committed to the business, but we are relying on them on their revenue for the next few months as we go through this. And if anything changes on either side, then let’s have a conversation. But, you’re really inviting them to understand how important that revenue is [for you].
“Fourth: Postpone discretionary payments but be first in the line of fire”
The easiest thing for you to do is to defer bonuses, dividends, and other discretionary payments. And if you do that, then you should be the first person to show everyone that you’re taking the pain along with everyone else. I have a client who has just done this; to tell their staff that they’re still getting a bonus, but it’s not going to be paid on time. It’s going to be paid late. And same for the owner (my client).
I talked about the relationships, but it’s really important that you make the staff understand where they stand. Everyone knows that if they lose that job, they’re not going to find something else (anytime soon). So you’ve got to communicate to your staff about whether they are going to be looked after — is their job at risk? Are you going to expect them to take a pay cut? I was talking to someone yesterday who runs a big chain of retail shops and a big online business and they said that they have put all the senior stuff on minimum pay and they did that up front in a way that sends the message: “we want you all to keep your jobs, but this is the way of doing it. You’re gonna instead of earning X hundred thousand a year, you’re gonna earn ten thousand a year [for the interim period, with potential payback at a later date].”
“Fifth: a slogan to remember that cash is still king”
The fifth one is: remember that Revenue is vanity. Profit is sanity, but cash is reality, and cash should be your number one financial KPI.
So, to summarize, what’s your advice?
Deep: So, in summary is there some final financial advice that you can give the entrepreneur?
David: Every business leader is obsessed by the P&L, and it’s great to be obsessed on the P&L — but you really, at times like this, need to focus on the balance sheet. The balance sheet is where cash is managed and where cash is understood. So as a tool I would educate yourself on how the balance sheet works and look more closely at it as one of the real financial reports. Perhaps my book ‘Between the Balance Sheets’ can help you shed light on this a little more.
Look at the working capital, which is your accounts receivable and inventory minus accounts payable and deferred revenue, and work out how big it is, see whether it’s developing over time and whether there’s a way to reduce it. It could be, for example, to change the way that you invoice, change the time point that you invoice. For example, for a two month project, I’ll pay the invoice half after month 1 and a half after month 2. Could you change it? So that it’s a third upfront, a third at the end of month one and third at the end of month two. That’s the sort of thing that can have a positive effect on your cash flow.
However dark things get, develop a plan with cash from customers, suppliers, staff, and the government. Your approach should be nothing is impossible. Delay paying bonuses, reduce salaries, offer shares instead of cash, ask for a three month or stop paying it. Stop paying the unfavorable staff. Nothing is impossible, just some things are just less likely than others. Be open and trustworthy with everyone. Tell the staff what’s going on and keeping them up to date. Lead from the front by not taking a salary until the crisis is over. It’s helpful if you have someone close to you during doing all of this, doing the daily cash flow calculations.
What should entrepreneurs carry ahead as hope?
Deep: What would be a carry-forward positive message for entrepreneurs?
David: A time of crisis and problems and change is also a time when great opportunities will come up and it helps to keep your eyes open for those opportunities. You don’t know what they’re going to be, but they will emerge.
This interview was conducted by Dr. Deep Parekh of Epistemy BV, a strategic advisory firm based in Europe. More articles by Deep on Medium can be found here. This interview was arranged by CEO-CF as a part of the Reflections publication on Medium.
