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In times of major economic crisis, even the most pessimistic scenarios often prove to be too optimistic. Entrepreneurs face several crucial challenges: ensuring both upstream and downstream supply, adjusting the company size according to reduced workload, adapting to new industry trends, managing liquidity, and preserving the essentials. Rethinking the business model can be an opportunity during a crisis, focusing on economic impact and cash generation. Creating value for customers is paramount, and business and financial forecasts help guide plans and decisions.
E. Krieger
When a major economic crisis occurs, even our former worst-case scenarios often prove to be too optimistic, as no one expects entire sectors of the economy to come to a halt for several weeks. When your order book starts melting away faster than an iceberg facing global warming, you may need to shelve your initial budget and radically revise your business and financial forecasts.
What are the main challenges for an entrepreneur?
My colleagues and I have interviewed numerous entrepreneurs and leaders who have previously faced major crises like the recent pandemic. Unanimously, they declared that procrastination is not an option in the face of such events. Your main challenges can be summarized as follows:
- Securing upstream and downstream: You can’t sell anything if your production chain is down, starting with your main suppliers. At the other end of your value chain, you also need to take care of your existing customers more than ever.
- Resizing the company to adapt to the new workload: Such resizing often involves reducing fixed costs to reach your breakeven point even if your revenue is more than halved.
- Adapting to new industry trends: Digitalization, big data, AI are more than just buzzwords. Health and/or economic crises promote remote work. You will have no choice but to follow this growing need for performance and IT security.
- Preventing liquidity crises: Entrepreneurs who have previously faced liquidity shortages understand better than anyone the saying « your cash is more important than your mother. » In a major crisis, no one will provide you with enough liquidity to cover your fixed costs unless you have strengthened your working capital and limited your operating cycle. This involves securing credit lines and monitoring your cash flows daily.
- Preserving the essentials: When a company is fighting for survival, its leadership no longer has time to dream of extravagant diversifications once fueled by prevailing euphoria. The decision to maintain only strategic projects with short-term revenue prospects becomes imperative.
These tough decisions are vital for preserving a company’s key resources, starting with employee motivation and conviction that their leaders have a clear vision and course of action.
A major crisis can thus provide a unique opportunity to rethink your economic model.
Before and after major crises, a virtuous economic model involves making a significant economic, social, and/or environmental impact and generating recurring cash flows. This isn’t an ideological bias: ultimately, an entrepreneur will have the freedom of their operating cash flows or will be constantly reliant on funders with a sword of Damocles hanging over their heads.
Let’s now examine the financial leeway in times of crisis and the key elements that should be scrutinized even more than during « normal » periods.
Financial and Operational Levers
Cost reduction is not an end in itself, and the same applies to fundraising. Your primary funders shouldn’t be your investors or bankers; they should primarily be your customers. Many companies grow with no resources other than the money paid by their customers, and this philosophy has given rise to numerous global leaders. Venture capital is undoubtedly a powerful tool for developing ambitious startups, but it benefits only a minority of companies with highly « scalable » and profitable economic models. These fortunate few are funded by venture capital or growth funds if they can become more than just energy dissipators.
Now let’s look at the main available levers, focusing on operations. This list is not exhaustive but summarizes best practices in terms of cash flow generation and management as a whole.
Operations: The Royal Path to Cash Flow Generation
- Improving margin and/or revenue: In times of crisis, the relevance of your value proposition and the quality of your marketing and sales plan are more critical than ever. If you can measure the value your offer creates in the eyes of your customer and if that value is substantial, your margins will be high. Otherwise, even the best marketing and sales team will struggle to convince potential clients or retain existing ones.
- Increasing sales per customer: Before trying to reach new customers, it’s often more profitable to sell additional services to existing customers, as there’s no additional acquisition cost. For instance, a company developing digital identity management solutions for large enterprises can complement its current economic model with professional services, even if such services require more staff than a purely software-based model.
- Optimizing your working capital requirement: It’s more necessary than ever to reduce these two major components of your working capital requirement: inventory and receivables. A major crisis should prompt you to part ways with « toxic clients, » those who pay in over 120 days, often after numerous reminders. Unless you’re a financial institution yourself, you’re not meant to be the bank for such clients. When these champions of late payment are large corporations, the practice of « name and shame » should be generalized to reveal such behaviors that create a fatal chain effect for the economy.
- Deferring social charges and other dues: When your company is short on liquidity, deferring social charges or other taxes becomes vital. Such deferred payments certainly reduce your current cash consumption but impose generating additional cash flows as soon as possible to pay these ongoing operating costs.
- Reduced hours and vacations during slow periods: Adjusting your company’s payroll expenses to an economic slowdown is a good way to avoid layoffs. During the Covid-19 crisis, most countries have generalized access to partial unemployment. Similarly, encouraging employees to take more vacations during slow periods is a way to optimize a company’s capacity to serve its customers when needed and reduce costs when activity drastically decreases.
Financial Flows: In Addition to Everything Else…
- Accelerated recovery of public aid and tax credits: Technological startups and innovative companies are often subsidized by various public bodies, including research tax credits. In times of crisis, recovering these aids becomes a priority.
- Postponement of partners’ remuneration: When liquidity is scarce, paying dividends is counterproductive or even shocking. Similarly, if company partners can afford it, a portion of their remuneration can be deposited in the company’s current account to maintain sufficient cash reserves.
- Capital increase or convertible bonds: If necessary, you can also issue new shares and/or bonds, but this is often the most expensive source of funding, especially when the competition among venture capital or growth funds to finance startups has subsided.
- State-guaranteed bank loans: These loans are granted by most states to avoid as many bankruptcies as possible. Even if your company doesn’t urgently need this money, taking such loans to secure your liquidity and avoid future liquidity crises makes sense, provided you generate sufficient future cash flows to repay these loans as quickly as possible.
Value Creation and the Virtues of Forecasts
Ultimate room for maneuver lies in the value created for your customers, which is why the best financial analysts don’t just analyze balance sheets or income statements. Without a solid marketing plan, strategic planning often verges on romanticism. This is why this article on cash flow management in times of crisis focuses primarily on business activity and the concurrent generation of operating cash flows.
Dwight Eisenhower’s aphorism that « Plans are nothing; planning is everything » perfectly encapsulates the importance and limits of the planning process. Business and financial forecasts are collective actions that create a shared vision and a common will to execute such plans.
Entrepreneurship will never be a smooth ride, but a minimum of financial prudence should help you overcome most difficulties. Like Ulysses, you can then savor your journey into the new world that opens up after a major crisis.
