Maintaining Financial Discipline

Suppose reality exceeds your worst-case scenario, and you find yourself in serious financial trouble what happens then? Vistage speaker John Zaepfel, who has rescued several businesses from the brink of disaster, offers tips for short-term and long-term financial recovery.

Righting the Ship
When a company finds itself in a dire situation, its management team should immediately devise a short-term plan to turn itself around. Ten steps to keep in mind:

  1. Go into full crisis mode.
  2. Protect and manage your cash flow.
  3. Develop financial discipline.
  4. Attack the gross margins.
  5. Work with your bank and creditors.
  6. Create a cost-control team.
  7. Revise the organizational structure.
  8. Protect your service and current accounts.
  9. Focus on the core business.
  10. Identify a new model for the business.

Maintaining Financial Discipline
Once the immediate crisis passes and the company achieves a positive short-term cash, the next step involves practicing ongoing financial discipline to achieve long-term profitability. This includes the following:

  • Strive to increase your cash buffer. The cash buffer (total cash on hand plus cash taken in each day, divided by how much cash you use each day) represents how many days until you run out of cash. Once your cash flow turns positive again, work to increase your cash buffer as much as possible.
  • Tighten up on accounts receivable. Put a high priority on collecting on all delinquent accounts, especially those more than 60 days. In a real cash crunch, the CEO should consider personally collecting on any accounts over 90 days.
  • Reduce inventory. Take a hard look at inventory strive for just-in-time delivery from your vendors. Turn your excess inventory into cash as fast as you can.
  • Liquidate underutilized assets. Look for underutilized machinery and equipment that can be liquidated into cash.
  • Extend payables. Payables come in three categories: Essential to the business (usually sole suppliers), important but not essential, and commodity products you can obtain from any number of sources. Prioritize your payables and pay accordingly.
  • Track key balance sheet ratios. Calculate and keep a close watch on the balance sheet.