How to pivot when you’re in financial distress.

Q: I’ve missed my revenue targets and incurred losses for several months now, I think it’s time to pivot. How do I make the right changes?

A:

I read an article over the weekend about how insolvencies in Canada have ballooned in recent months. For those unfamiliar with the term, insolvency is a state of financial distress in which a company is unable to pay their bills/debt and it can often lead to permanent closure. The difference between a company in financial distress that weathers the storm, and one that shuts down, comes down to how they manage cash.

We’ve all heard the term ‘cash is king’ and it’s because it’s the lifeline of the business. When times are tough, the first thing to do is to take a cold, hard look at cash flow and map out cash inflows and outflows by day / week / month.

When my clients are going through periods of tight cashflow, we roll up our sleeves and forecast cash on a daily basis (i.e how much cash is coming in, and how much cash is going out every day) This is done on a spreadsheet, by capturing all the data required to make it as accurate as possible. The goal is to predict how much cash we will have at the end of each day - with a very high level of accuracy. Over time, having a disciplined cash forecasting practice with my clients prevents cashflow issues, because we spot problems several months in advance.

Once we can see the curent state of cash coming in vs. cash going out, we can pinpoint the exact days cash will be tight, and the exact gap that will need to be filled. This allows us to put a focused plan in place. The number one priority across the business has to be to fill the cashflow gap. The entire leadership team should know how much cash is needed, by when, and they need clear instructions of what they need to deliver to ensure gap is filled in time.

The exact plan will be specific to the business, but it could be a combination of a few things: cutting back on non-essential expenses, letting go of staff, seeking a loan from a bank/friend/family, following up on accounts receivable, taking advance deposits from customers, or changing the business model altogether - this will be the pivot.

The pivot might include both temporary, and non-temporary measures - we are going to temporarily cancel non-essential subscriptions for 6 months, and we are permanently eliminating X position(s) from the business.

Who should decide? When a big change is required - it often makes sense to have a few key decision makers at the table (it can be counter productive to have too many chefs in the kitchen). Do make sure to include an outside advisor -  as they will ask more critical questions and challenge the status quo.

How will I know it’s the right plan? The plan has to be modelled financially so you can measure the impact of the change and ensure it will lead to the results that are needed. You will need to create forecast financial statements that can show you when the company will be profitable and cash positive again. The plans have to be conservative, and realistic. At the end of the day, the forecasted numbers have to provide your team with confidence that the company will generate enough cash to sustain itself. If not, then the plan has to be iterated until the numbers are favourable.

Getting professonal advice is extremely valuable. A plan that has been challenged and stress-tested will be more robust - which in turn, ensures longevity of your bus