Cash is Critical in a Covid World

“Cash combined with courage in a time of crisis is priceless” (Warren Buffett).

It may even be said that cash in hand itself creates confidence, which allows us to then have courage to face challenges and crises, like navigating the Covid19 pandemic. This is because the generation of cash provides:

·      an ability to navigate and manage rapid change

·      building blocks for future business growth

·      consideration of opportunities as they arise, especially as other businesses wither during crisis or new markets are created

·      confidence in our business strategy as we weather storms

According to Melbourne, Australia based Financial Planner and 30 year industry veteran, Matthew Fogarty, liquidity today has two key additional benefits. “First, in volatile times cash is the great enabler. It allows transactions to be undertaken and opportunities grasped more easily in difficult times. Second, and I cannot stress this enough, cash reduces anxiety. While we must respond to urgent requirements, not constantly worrying and reacting from one moment to the next gives us time to think of the best options and seize opportunities or make decisions that we would not be clear about if we were highly anxious”.

It seems that with the right mindset and cash in the bank, you can do anything in business because ready money is the safety net of business risk. It allows you mentally cope through the peaks and troughs of business cycles.

The key, Fogarty says, is to build cash reserves of 6 months. Simply put, that the business has 6 months of cash to pay expenses if income dried up tomorrow. “Statistics show us current Australian small and medium business cash reserves are no more than 2 months best case, and 1 month real case”, Fogarty said. He thinks we will see many businesses go under because of the recurring health and economic challenges posed by recurring waves of the Covid19 pandemic.

Matthew also believes from discussion with colleagues around the world that this 1-2 month actual cash reserve is an accurate reflection of what is going on across the globe.

There are several things businesses can do to improve their cash positions.

First, make sure retail pricing is right. Most small and medium businesses do not have an accurate pricing structure that reflects all costs, including delivery of their finished product. This is especially true for delivery of services, where labor costs are not properly factored in and margins are much thinner than believed.

Fogarty says the 30-30-30-10 turnover rule of thumb still rings true:

30% of turnover is expenses

30% is labor/staff costs

30% is profit

10% is buffer

“30% profit is the risk payoff for being in business”, Fogarty says, “so price and structure things accordingly.”

Second, keep a ruthless eye on costs during challenging times. This is especially true of stock management, which is increasingly challenging to manage during disrupted supply chains. A simple formula, when put into effect, can have a 50% positive uplift on business Profit:

·      Improve sales by 2%

·      Reduce costs by 9%

Third, be diligent on managing debtor and creditors. My late father-in-law, a very successful businessman, used to tell me that credit terms are a privilege, not a right, so don’t be afraid to ensure following up for payment on due dates. And for debtors, he used to tell me that it was important to establish a clear policy for payment, communicate that policy clearly to suppliers, and most of all stick to it. Your business then becomes trusted over time, and if something terrible does happen, you will have earnt the right from suppliers for allowance.

Most important, be excellent at what you do. Focus on your strengths and leverage them with customers. This creates an ‘unfair competitive advantage’ in the market place and makes it harder for your competition to take market share away from your business, while conversely allowing you to take share from others.

Building cash reserves will also have a significant positive impact on the business’s Balance Sheet – which tells us what our business is actually worth if we were to sell it. Cash is one of the critical assets in the Balance Sheet, which can be used to pay shareholders (which lowers our current equity in the business) or to grow the business, which yields a larger return over time.

Building cash means building the business. And ready money gives us confidence to weather, manage and even thrive during crises.

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Adam Slonim is the founder of Blended Learning Group which assists organisations with Leadership through Emotional Intelligence, Communicating with Purpose, and Sales Capability, and has partnered with Celemi to deliver business management programs though Australia & New Zealand.

Adam was previously the National Sales Manager of Australia’s largest outsource provider, managing a team of sales, account and marketing management professionals responsible for over AUD 300 M annually

Adam is currently an Adjunct Fellow at Victoria University teaching Cultural Intelligence and a Board member of the John Curtin Research Centre, where he co-authored a paper on Artificial Intelligence and the Future of Work.

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