Entrepreneurs frequently ask me how they can make their businesses more resilient. I tell them that sound cash management plays a critical role as most mid-market companies typically function with just a 30- to 90-day liquidity buffer, without rich balance sheets, extensive credit lines or lots of cash lying around.
Any number of situations can set a business back: competitor innovation, inflationary pressure, a pandemic, supply chain disturbances and more. Regardless of the sector a business calls home or what product or service it offers, entrepreneurs need to confirm that their companies have ample cash lifelines during disruptions.
From watching companies go through ups and downs throughout my career, here are my top three tips for financial resiliency and business survival.
1. Be aware of and avoid common cash management fallacies
According to analysis of data from the Bureau of Labor Statistics, more than 18% of businesses fail within their first year and 50% within the first five years.1 While I can’t speak for every company, in my more than 25 years of experience, a great many business closures directly result from poor cash management tactics that leave a business without good options and, therefore, the inability to overcome macroeconomic challenges.
During the height of the COVID-19 pandemic, there was massive disruption to the workforce, supply and demand. For some companies, that meant sales and cash evaporated overnight, while at the same time, their sources of capital dried up. You can’t run a company without customers, and you can’t satisfy obligations without liquidity.
Too often, ambitious entrepreneurs pour their energy into making their products or services more competitive at the expense of managing net working capital: accounts receivable, measured as days sales outstanding; accounts payable, or days payable outstanding; and inventory, or days inventory outstanding. They don’t make sound cash management a priority and leave themselves vulnerable to disruptions, such as a pandemic or a down market.
As my colleague Peter Kingma said, “The balance sheet is your suit of armor in turbulent times, and if it’s strong, it gives you the opportunity to respond in ways that others can’t.”
It’s harder to see the impact of resiliency efforts if you’re only looking quarter to quarter. For some companies facing shareholder pressure or other calls for an immediate return, this can create conflict with the need to generate short-term profitability. However, underinvestment in maintaining your balance sheet can lead to failure.
It falls to leadership to understand this and strike a balance; no one will enjoy returns if the business has zero operational resiliency.
2. Know your position in the different stages of a disruption
The wider business community categorizes resiliency according to the various stages of a market downturn and into three phases similar to how government agencies categorize natural disasters: prevention, response and recovery.
The stages are as follows: