Cash Flow Triage

I just finished a discussion with the controller for a golf course, and a potential client. Their circumstance is not atypical. Cash is tight, vendor payments are delinquent, fixed costs (particularly employee salaries) are high, accounting systems are not producing accurate nor timely information, and the business is seasonal. Spring and summer are the critical times, and the business is into their busy season in not very good shape. Owners are having to contribute capital to keep it going, as they have for the prior few years.

The controller, who is only 3 months in to the position, tells me that for the past two years there weren’t really any financial statements and now the owners want the numbers accurate, and right away. Nearly impossible to get done, right away. What to do?

I told the controller to set aside history for right now. I suggested she put together two forecasts: One showing where the business and its cash are headed under the current volume and cost structure, and a second forecast under a structure that at least starts from cash flow break even. I told the controller to set aside worries today about the delinquent vendor payables, the property taxes now coming due, and the bank lines that may not be renewed. None of those can be fixed until the business is cash flow break even to start, and then cash flow positive going forward. The controller believed the bank would provide additional funds to tide them over, as they had for the past two years. I thought not.

The forecast of the current circumstance is easy: project from current revenues, subtract the current expenses and minimum vendor and bank payments and the result is the net cash deficit. Calculate a time to exhaustion of the remaining cash resources and show the owners how much they will have to contribute to the capital and when. Their pain threshold will be sorely tested.

Then show the results after the tough decisions. What decisions? What amount of payroll dollars must be cut, and who? Which ongoing monthly costs must be eliminated? Travel, meals, advertising, excess space and rents, equipment, repairs… Review every line of expense and lay out what it takes in cost cutting to get to cash break even. From there forecast forward the cash flow and match to the delinquent vendor payables, back taxes, bank loans, etc.

You cannot fix delinquent accounts, past due bills, late installment loans, line of credit advances, past due mortgages, etc. until you triage the cash flow. Once you stop the bleeding, only then do you have a chance to make the patient well.

I repeat: the critical step is to detail what it will take to triage the patient and get to cash flow break even. That is what the owners need to hear and understand from their financial experts. Only then is there any future.