In a recession, cash is king

“Follow the Money”
“Because that’s where the money is”


In a recession, cash is king


A South American country was continually and publically threatening its neighbors with immediate invasion as a means of diverting its population from the little fact of 1200% hyperinflation. They reset the currency every day at Noon by some factor, usually small, but sometimes by double digit percents. They also instituted personal, manufacturing, export and repatriation exchange rates. I was running the local subsidiary of a US company and early on naively accepted payment from a government agency at 11:45AM in local currency. 15 minutes later and on the way to the bank, the currency was devalued by double digits and I had to eat over $250,000. That’s hyperinflation


The only way to survive was to use Accrual Accounting for my HQ reporting (and local statutory filings) but operate on a daily basis as if this was a corner deli, that is, on a cash basis. We developed a ‘30-Day Sources and Uses of Cash’ report and at the close of business each day, did the “we took in X, spent Y, still have money in the bank so we’ll open again tomorrow” discussion. In doing so, we had an accurate understanding of our immediate business health and the amount and timing of our cash needs/sources and sufficient time to address any expected cash shortages. Before we developed our 30-Day cash report we would occasionally get our cash timing wrong and scrambled to survive. From this I learned the only way to survive a difficult economy is to live by your timed cash flow. Not to say that accruals were or are a bad thing, quite the opposite, but on a daily basis we needed to know if we were distressed or healthy. Accrual Accounting just did not fit our daily lives.


We have to treat today’s severe recession as if it is as dangerous as hyperinflation and manage by cash over a rolling 30 day window. No, they are not the same thing, but both represent extreme economic dysfunction and living for the present is the best way to survive. I know of several businesses that are, on a cash basis, highly distressed while on an accruals basis, healthy. Just recently I dealt with a company that was healthy per Accrual Accounting, but the owners had to arrange an emergency cash line and inject some of their own monies as well because on an available cash basis, the company was technically borderline distressed and the bankers didn’t care about their accruals.


When managing on a rolling 30-Day Cash basis, you have to monitor only a few key things:
• Cash on hand
• Cash to be collected within 14 days
• 30-Day Burn rate, especially if any belt tightening remains to be done
• Revenue Leakage


The first 3 are self explanatory, but the 4th isn’t. Revenue Leakage occurs when sales reps sell your product or services for less than your approved pricing guidelines and discounting policies. This often occurs because your reps are trying to keep their jobs and your order entry systems permit out of bounds pricing. The problem with Revenue Leakage is the immediate impact it has on that king of all recession needs, cash, because it overcomes any smart negotiating you did to lower your Cost of Goods Sold and upsets any in/out cash flows. In other words, you worked hard to get the best deal from your suppliers and your reps are giving it away and this pretty much guarantees a cash shortage in the very near future.


The takeaway: During severe economic recessions, manage by the real-world metric called 30-Day Cash. Thinking in terms of cash buys you the time you need to survive long enough to build for the post-recession future. The ‘30-Day Sources and Uses of Cash’ report is your single most useful daily operations management tool.


Richard Eichen is a senior turnaround and crisis manager and is a Managing Principal at Return on Efficiency, LLC (www.growroe.com) and can be reached at richard.eichen@growroe.com.