Cash management and Financial analysis for SMBs — Part 1
This is the first part in a series of posts on how startups and SMBs can navigate and plan for the future in this COVID19 scenario.
Small business owners and Startup founders face myriad of challenges ranging from managing a business loan to retaining clients, ensuring on-time delivery of product or service to ensuring clients pay on time. The bottom line of all issues comes to financial management.
Especially in this dire situation where businesses across the world are impacted by COVID-19, it becomes more important for businesses to look inward and find ways to unlock cash wherever possible.
In this note below, I have tried to share my perspective and have shared additional reads, on aspects that a business can look into to try and improve their cash position.
Sales management
We know B2C sales is affected for almost all commodities that are non-essential in nature. Though this is a blessing in disguise for some online chains and areas like telemedicine, however, all else is impacted poorly. There’s little we can do when there’s a restriction on the normal functioning of a business. For such businesses, we will explore in Cost management and cash management section what could potentially be done.
We will discuss here mainly what B2B companies could do.
Your customers will also feel the pain during this crisis. Their priorities may have shifted overnight as the crisis worsened and they may also be grappling with the changing economic scenarios.
There are two things which I learned from reading numerous articles on sales management during this crisis from gurus:
For prospecting new customers:
- Don’t panic. Don’t stop selling.
- Serve before you sell — to do this it’s important sales team has embraced the changing scenarios
For existing customers:
- Communicate with them and reassure them of your continuity of service. Highlight any areas where service could be hampered.
- If there’s a churn due to customer’s short term cash flow issues, explore how your offering could be adapted to ensure continuity — however care should be taken that this doesn’t come at the cost of your cash flows.
Resource: I found this HBR article useful to think on certain points related to customer and sales management: https://hbr.org/2020/04/ensure-that-your-customer-relationships-outlast-coronavirus
Receivable management
This is always an important area irrespective of the size of business and more so for SMBs and even more so now!! That’s why I have decided to have a dedicated section on receivables.
Ask for payment. Unless you ask you may not get. If your customers are large enterprise clients, who generally have better access to capital and working capital facilities, it is very important you ask for your outstanding payment from them.
Pre-payment discounts might encourage immediate payments. This might also be the situation where your customers want to make the most of and ask for cash discounts for immediate payments. It may be ok to honour those discounts as increasing your liquidity is more important.
Collection is an important task of the business owner. More so now. Even if you don’t have a dedicated collection team, if you have excess capacity with your employees now, try to create that collection force now.
Don’t leave the bottom-most dues as well. Generally, due to bandwidth constraints, only the customers with large accumulated dues are followed up with. However, now is the time to look at every one. From my experience, I have seen the bottom 5% of receivables generally going bad sometimes just because of lack of follow up. And this is a direct impact on the bottom line. This is the scenario where no stone can be left unturned.
Cost management
In cost optimization, it goes without saying and many of us intuitively follow 80–20 analysis, ie dive deeper into cost heads that contribute to 80% of overall costs.
While at the outset that is a good starting point, I will try to discuss some points around how we could think about cost optimization:
- This is the time, where we have to look at even the bottom 20% of costs. I learned the value of 1 paise when I worked in incense business as I could see how even 10 paise multiplied by millions of packs will start showing it’s impact on the bottom line. Time to look at those small spends which were flying under the radar till now. Because a collection of those tiny spends could add up to the salary cost of an associate whom we would have otherwise retrenched.
- Payroll is generally the largest category of expense in any P&L. However, generally, top management would contribute to a major chunk. Below is a very useful quote I read about how to think on payroll costs in trying times —
“In the 1990’s, sociologists James Baron and Michael Hannan analysed the founding cultures of nearly two hundred technology start-ups in Silicon Valley. They found that most followed one of three basic models: the star model, the professional model and the commitment model. The star model focused on finding and hiring the brightest people. The professional model focused on building the group around specific skill sets. The commitment model, on the other hand, focused on developing a group with shared values and strong emotional bonds. Of these, the commitment model consistently led to the highest rates of success. During the tech-bubble burst of 2000, the start-ups that used the commitment model survived at a vastly higher rate than the other two models, and achieved initial public offerings three times more often” — Dan Coyle “The Culture Code”
We will cover more on Optimising Costs in our next article which is an interview piece of Finance head of a large corporate.
Other cash management areas
These include Capex commitments, Vendor payables, Statutory obligations like taxes, Repayment of debt, etc.
This is the time to be on top of government announcements and make the most of them. For eg. if there is a relief given for deferring tax and debt obligations, should grab them. We may not spend them, but better to have that liquidity. Once demand picks up and depending on the industry you operate in, if there’s a sudden spike in demand, this liquidity will come in handy to invest in working capital to service the demand.
Whatever doesn’t kill you will make you stronger for the future
While managing vendor payments, it is important to handle this with empathy as your vendors might be in the same position as yours. We will discuss about this and on the applicability of force majeure more in our next post.
A good collection of material if put together by some of the biggest investors. Though it is meant for startups, I think many of the aspects discussed would apply to any business at large. Do take some timeout to read through this.
Power and importance of data analysis and specifically financial analysis in this scenario
To be able to make business decisions be it cost optimization or which are the low hanging customers to ask for payment, all comes down to the availability of data and analysis of that data.
For example,
Data in Receivable management, it is important to have the below data:
i. Customer persona — customer size, customer industry, how has their past payments been — this is important because based on the size and industry a customer operates in, we can assess the potential impact the customer could have due to COVID and prioritize our efforts accordingly
ii. Any pending disputes with a particular customer
iii. Ageing report — we generally get this from any accounting software or ERP
iv. Mode of payment — this is also important as if a customer is still used to paying by cheque for whatever reason, this information will be useful to prioritize and communicate with the customer accordingly
Data analysis will help us channel our efforts better in managing receivables and results would be more effective.
Data in Cost optimization:
We may need the below data to manage costs
- Spend a load of different heads and categories within heads — for eg. it’s not enough to just know what is the overall employee cost. It is important to know what is the break up of basic salaries, perks and allowances and again split into senior management, mid-level management and junior staff.
- Recurring spends — this could be monthly or quarterly or annual recurring. Analysing past period data will throw light on any impending commitments and that will in turn help on which we could avoid.
- Active contracts — this data might not be available in a financial system however is very critical to know the magnitude of contractual commitments.
- Auto-debit instructions if any
These are just some major categories and some are non-obvious ones.
Collating data from diverse sources and different functions is important to understand expense trends and future commitments and to identify optimization areas.
I would like to close with the below thought-
When fishermen cannot go to sea, they repair their nets — Nabil Sabio
While many businesses are in fire fighting mode, a silver lining is, businesses that survive this time, would have re-looked at things critically and cut most of the flab and emerge stronger with higher efficiency.
For well-funded firms or firms with good cash reserves and balance sheet, this may serve as an opportunity to invest more in the business and surge ahead of the competition.
Many businesses with low digital adoption might have been pushed to take the first step towards adopting technology and data analysis to understand trends and metrics. This might hopefully set the trend for digital transformation and using data for future business decisions and operations.
If you need to discuss any specific challenge faced by your organisation or think I can help you with any of the points above including data analysis, please feel free to reach out to me or leave a comment below with your email and I will get in touch with you.
