Do you really have enough cash? Let me be more specific: Do you really have enough cash for some unexpected horrific event in your industry? Hertz Corporation, a household name for decades to business travelers, filed for Chapter 11 bankruptcy last year when the travel industry collapsed. They were already short of cash in an attempted turnaround of their business when the pandemic hit, and they had nowhere to turn. What about your business? Can you say with certainty that you will not face a sudden, unanticipated event that would suddenly cause your revenue to drop by 40, 50, or 75% or more? Such events, even for a few months, can easily cause the death of a company if they don’t have the resources to see it through. For example:
- You operate a chain of restaurants and two of the units in your chain are hit with shooting incidents from unknown (and uncaught) shooters, causing regular customers to stay away fearing the unit they favor will be next.
- You manufacture parts for an airplane that has just crashed for no known reason – sorry, Boeing – and orders for those parts, which make up 50% of your business, stop cold. The FAA will likely take a year or more to clear the fix.
- You’re a SaaS business or web services company and a wave of hugely successful hacks from some bad actor has suddenly made internet connectivity unsafe for virtually every one of your customers. So they sign off for 6 months or more until they’re convinced it has blown over.
Whether you’re the company’s CFO, or its CEO, or a member of its Board of Directors, it’s your responsibility. And the only thing you have reasonable ability to control is access to the one commodity that can tide your company over – cash. That doesn’t mean your company needs to have a closet full of money sitting collecting dust, i.e., .02% interest. It simply means you need to have a way of accessing enough cash to pay the company’s fixed costs for an extended period of time. How much is that? That all depends. One thing is sure: If you don’t know what your fixed costs are, if you don’t have access to a bank credit line or easily accessible cash reserves or saleable investments, or if your lifestyle demands that you take most of the cash home every quarter as ownership distributions, then how much doesn’t matter because you won’t have it. This is where your finance team comes in. They need to provide the answers to these key questions:
- How much money do we need to have each month if our revenue goes to zero?
- How much money can we access quickly to cover that number, and for how long will it last?
- If the answer isn’t good enough, what are the recommendations to make it better?
If you think it can’t happen to you, let me introduce you to the (former) CEO of Hertz.