Managing Your Business During a Crisis – Part Five
At the sharp end of things is the need to manage for cash. If you can’t pay your bills, no matter how profitable you are, you will crash and burn. There are many tactics that can improve cash flow. Some of these are short term and one-off measures. However, to resolve any cash crisis you must have the right Valuable Formula and you must operate the business sensibly.
How do we navigate our way through this economic turmoil? How do we ensure that our businesses survive in order to provide us and our employees the ability to enjoy a full and safe life outside the workplace? How do we ensure that our businesses will in fact prosper, or at least be positioned to prosper, in the future? The bottom line is that we can’t simply rely on the things we’ve done in the past or on government assistance alone to get us thru this Covid-19 crisis. We should instead use this time to evaluate every aspect of our business and chart a course for the eventual recovery from this crisis.
We decided to dedicate a series of blogs to offer some clear and concise ways for a privately held business how to re-examine itself, to identify the key elements of its success, to develop strategies for ensuring its survival during economic turmoil, and ultimately to build a plan for thriving in the present and the future. In part five of this series we will focus in the need to manage your cash flow.
Getting your Balance Sheet Right
Many business have a poorly structured balance sheet and pay the price for it. Assets are financed from either debt or equity and the right balance is needed. As things get tight, try and move
your balance sheet to a ‘lower gear’ (more equity and less debt) as this reduces risk and also reduces the servicing costs. Equity is more expensive as it carries a risk and hence demands
a higher return over the long term but it is more forgiving in terms of servicing in the short term.
For many privately owned businesses there is funding from shareholders (founders) that appears as debt but is quasi equity in that it is very long term; it is not expected to be paid back and it carries no interest. For the purposes of calculating your gearing, this should be treated as equity. It is important to remember that equity comprises capital contributed to the business plus any retained earnings left in the business, so if you are a profitable business and you have not taken all the profits out you are building equity. If you draw more cash out than you have made in profits
then you have reduced your equity. In tough economic times where losses are being made, your equity in the business will be reducing and as a consequence your gearing is increasing, and this can lead to trouble.
Interest Cover = Profit/Interest Expense
Gearing is debt/equity and a balance sheet that is highly geared or highly leveraged has used a lot more debt than equity to purchase assets. Assets – Liabilities = Equity or restated
Equity + Liabilities = Assets. This means the funding of assets has come from either debt or equity and the proportion of each used is called gearing or leverage.