As I’ve mentioned elsewhere in these posts, I’m focusing on companies that typically classified as “middle market”, or even “lower middle market”. These are businesses with revenues between $50 million and $1.5 billion USD. Further, given my background (this should be no surprise), I’m going to focus even further on private equity backed businesses. This post is about shoring up cash.

Today, I’m going to walk you through five things you should be doing (or do them now) to drive increased cash / liquidity for your company. These five principles, if you execute them well, should be worth several million dollars (not something your average everyday blog post can say!)

1.) Know your minimum cash level and stay above it

Letting yourself drop below a float you know is prudent is a sure-fire way to get caught with your proverbial pants down, and it’s just not necessary (unless you are dealing with some form of financial distress and have few alternatives).

2.) Shoring up Cash by Managing A/R Tightly

Don’t let A/R management become a mechanical process that happens during your month-end close. Managing accounts receivable is the life blood of your business as it determines the cash that comes in – this is where everything starts. You may have cash rich, very generous and timely paying customers…congratulations, but you are not representative of the “norm”. Most likely, someone sitting at each of your customers is tasked with making sure that you tick all of the boxes (right invoice, right amount, right format, right etc…) to get paid. Be the most accurate wheel, and the squeakiest wheel at the same time.

3.) Accounts Payable – let the stretching begin…

There is a lot of situational nuance you have to think through here…first of all, you’ve hopefully been stretching your vendor payments by 1-2 weeks or more on a regular basis so the notion of being paid past due date isn’t totally foreign to them. Second, you should sort your vendors by criticality and start thinking through an initial plan for either renegotiating terms or determining how far you can stretch payments for each without operational disruption. If you have a long list of vendors, you may wish to (practically as well) focus on the top 80% and just start paying the others with increasing stretch until you arrive at your desired payment terms.

If time permits, do this as a program that lets you get your supply chain comfortable with the later payments. Shoring up cash is best done as a journey, not a knee-jerk effort. After all, they are still getting paid, just a bit later which lets you reduce your working capital requirements and thus drive up cash and decrease working capital. Thought about another way, each dollar of AP stretch generates a dollar of liquidity you can use to finance your operations and invest in your employees which will enable future growth and value back to those very same vendors.

4.) Shoring up Cash – Hold Back the CapEx

Pull the cord hard on any projects that are not essential. If you aren’t repairing critical machines or making sure your employees have a roof over their heads, or investing in tooling tied to revenue or customer contracts for committed revenue, pause for a moment.

Look at the list again, ask yourself if they all have to happen right now or as quickly as scheduled, is the ROI real or is some combination of optimism and cost avoidance driving a business case that you can’t 100% put your fingers on? This isn’t a time where ambiguity is your friend.

5.) Inventory management

This can be a massive lever, or a small one depending on the nature of your supply chain and the cost of your inventory. The inventory management we’re talking about here is identifying lower finished goods levels that you can operate at or live with, looking for ways to push raw materials to consignment models with vendors (even if they charge you a small amount), and driving down WIP inventory through initiatives like faster changeovers, etc. Books are written about inventory management alone so I’ll pause here because it is really the realm of the operations leaders and finance professionals in each business who will know what is wise and possible or foolish in this realm of activity.

Overall, you want to make sure you’re doing the basics right:

1.) Keep a decent level of minimum cash on the balance sheet – this is where shoring up cash starts

2.) Collect what is owed to you with religion – it is your money

3.) Stretch AP until it hurts, eventually – what you keep is your money

4.) Pause on the CapEx (and discretionary spend of course) – wait until the business case is rock solid

5.) Manage your inventory – make sure you monetize what you can asap