Need a new plan for 2020 or preparing for 2021? Consider a virtual planning session. Explore Your Options
Watch Demo

Cash is King – Do You Know Where Your Cash Is?

By Barry Pruitt

    Thu, May 14, 2020 @ 11:03 AM Annual & Quarterly Planning

    It was the 2007-2009 recession, and markets were uncertain. Things were generally OK with my cash runwaybusiness, yet with years of experience through many types of crises and emergencies, I knew I had to take asset and crisis management inventory. As I mentally ran through my checklist, I felt pretty good. I had a cashflow runway of four months, some additional ways to raise money. I thought some customers would make early payments in exchange for discounts and that there were some unused assets that might be sold. In a worst case scenario, there was the consideration of pay reductions or layoffs.

    On a personal level, I considered my HELOC (Home Equity Line of Credit) as part of my fallback plan. I was mentally relieved that I had put it in place in 2004. It was $60k, had never been used, and based on the current lower home values, I was still in good loan-to-value position. I had a fallback plan and could sleep well at night.

    Suddenly, I was blindsided by a nightmare. I received a letter from my bank that went like this:

    Mr. Pruitt, your HELOC account #555-555 is now stopped at your current borrowed amount. Due to the financial crisis we regret to inform you that you will not be able to withdraw any more funds. This is a reflection of the current financial market.”

    Since I had not withdrawn any funds on the account, that meant my HELOC was at $0. Since cash is king, where was my cash? It was locked up in the bank, never to be accessed by me.

    To continue the story, things went fine during the recession, and I did not need the HELOC – but that isn’t the point. The point is that I counted it as cash, and it wasn’t. Nope, it was the bank’s cash, and they made it clear that I wasn’t getting any of it.

    Download Guide: Questions to Consider  for Go-Forward Planning 

    That brings us to today and our uncertain times. Cash is still king, but are you counting something as cash that isn’t? You may be looking at options during this uncertain time, investigating the CARES Act and loans, counting on your company line of credit, even thinking your personal HELOC will be your fallback – don’t. Cash refers to, well, cash. Money owed to you in accounts receivables, excess or discontinued inventory that might be sold, your business line of credit, or anything that isn’t cash in your hands now can immediately evaporate in the worst of times. It’s not cash. It’s opportunity, and opportunities don’t last forever.

    Had I known during the last recession what I know now, one of two things should have happened with my HELOC. One, it would not have been counted as cash (only opportunity), or two, I would have withdrawn $60k so that it was cash, and perhaps for extra safety, I may have put it in a different bank. That would have allowed me to count it as cash. The interest may have been considered nominal compared to the peace of mind. The choice could only have been made if I knew then what I know now. That’s why I’m sharing this with you.

    As proof point that my experience and history can offer guidance, a leader from one of my CEO groups shared this with me on April 7, 2020:

    covid-19 cash runway

     

    Go back to your financials or your spreadsheet, and check your thinking. Cash is king, and... cash is cash. While looking at strategies to steer your business, to gain from the CARES Act, to collect receivables more quickly, to sell more, to gain market share and to minimize layoffs, remember this – cash is cash. Check your real cash position and set triggers for future decisions or events. If you have borrowing capability, would you choose to activate? If you delay activation, could the opportunity be withdrawn as quickly as a HELOC in the last recession?

    Jim Collins shares that every good-to-great company embraced what we came to call "The Stockdale Paradox:" you must maintain unwavering faith that you can and will prevail in the end, regardless of the difficulties, and you must simultaneously have the discipline to confront the most brutal facts of your current reality, whatever they might be. Confront your brutal facts. Double-check your cash assumptions, and verify that you’re not just telling yourself a story. Anything that you think is an opportunity to get cash is not cash, and opportunities don’t last forever. Face the brutal fact that cash is king, so you better know where the cash is. Knowing the answer will help you stay liquid, stay profitable and thrive!

    Download Guide: Questions to Consider  for Go-Forward Planning 

     

    Consider these blogs for your next strategic planning session:

    Annual Planning Playbook: 5 Steps to Create a Winning Annual Plan

    How CEOs Can Avoid High-Cost Mistakes in Annual Planning

    Best Practices for Annual Planning

    16 Strategic Planning Tips to Keep Your Strategic Plan Alive

    Have You Validated Your 3 Year Strategic Plan?

    Strong 3 Year Strategic Plans to Grow Revenue and Stay Competitive

    Photo credit: iStock by Getty Images

    Comments