Lessons Learnt from the 2008 Cash Flow Crisis
With this current situation for business it really is sink or swim time for everyone.
I appreciate that you are doing a great job of keeping it together. We’re all in this together, you maybe like most businesses have been impacted, there are some exceptions as always where you’ll see blogs about how some restaurants have pivoted or innovated (the new buzzwords) which is great, but this is going to be a long painful road trip. I read that 87% of businesses have been impacted.
The big secret to survival is Cash Flow, the question is how do you manage your cash flow during the coronavirus crisis?
Experience has been a bit of a dirty word in the last few years as the young innovators have pushed the digital economy forward but now experience of the 2008 Global Crash, I believe is the survival gold dust when it comes to business survival in 2020.
Survived is an odd word, Myself and Karen did survive the 2008 crash and went on to build a successful international digital marketing agency both here in the UK and California, USA and we even won the Best Business award in 2019 – but the personal price was high. The stress of managing our way out of the hell hole damaged Karen’s eyesight. Unfortunately there will be a cost to many of you, not only financially but personally too.
In order to help, With my experience of 2008, I’ve put together a survival cash flow guide. You will not get this type of advice from your CPA or Accountant. They exist to report your taxable earnings to the government, not to dig you out of a hole. I am providing my experience that hopefully addresses a wide spectrum of cash flow management that may keep you, your family, your home, your business and cars safe. The issue many younger business owners will face is that to survive will require considering actions that would normally be off the table. The answer today is different than it was 2 months ago. The ‘abundance theory mindsets’ and ‘hey stay positive’ won’t pay the bills. My aim is not to scare you but to take a realistic level headed approach.
Fight or Flight
Some of you are going to fight the virus crisis head and others are going to retreat – it’s the fight or flight response – neither is right or wrong. I think a balanced approach to retreat a little, pop your head up, seize any opportunities at different moments is wise. Please don’t forget, that as business owners you are a little more ‘fight to survive’, but others in your community are not as fortunate as you in their mind set, so look out for others too. We are dependent on healthcare professionals during this crisis, there may be things you can do to help people around you now and I would urge you to do so in addition to dealing with your business issues.
There are only three factors to consider with cash flow – sales, expenditure and funding.
My first item of advice however is ‘Be Nice’. You will need the help of customers, suppliers, employees and the government to get through this. Be kind and pleasant to all, as you will need to ask for favours or get someone to go the extra mile to help you. Some of you unfortunately will get into debt, be unable to pay suppliers and in turn, meet for the first time in your life debt recovery professionals. The ones who telephone you can be a little unpleasant, but keep your calm, explain the situation and aim to negotiate a payment plan. Remember if they have to physically send out an agent (which is difficult in the current climate), they will not make a bonus on your case. I always found that the debt recovery professionals who visited me, were real people who would treat you as they found you. Offer them a coffee and work something out – at a 2 metre distance of course. They will not call your partner and upset them when you are trying to pay and are nice. I even had a few jokes with the guys on occasion during the 2008 recession.
Oh, I did learn that if you have a personal vehicle with your business name on it, they can seize it – get that sign off if you are likely to encounter recover debt recovery agents.
Now you’re beginning to see what 2008 was like, remember that we went on to build an amazing business. Being nice, extremely willing to chat and carefully listening contributed to a large degree in our transformation from being financially comfortable, to poorer than church mice after 2008, to being an award winning successful digital marketing agency.
Worldwide governments are offering business support. Please take advantage of this support early as the rush to take advantage of this support will no doubt delay the support we recieve. We do not know how long the crisis will last or the aftereffects on the economy. So it’s better to be given the support then not need it rather than need the support but can’t get access immediately because your at the back of the queue
The Fed’s rescue program has gone from fantastic to a total mess. Support is being provided by multiple programs.. The $2 trillion rescue package was signed into law and unlike 2008, there is considerably more for small businesses. It’s not just the Wall Street Bankers this time, it’s your turn.
Whilst Trump, his businesses and family are barred from receiving financial support, it’s not the same for your business or you personally.
The legislation called the Coronavirus Aid, Relief and Economic Security Act, CARES Act, includes a $350 billion loan assistance for businesses with fewer than 500 employees (including sole proprietors, independent contractors and anyone otherwise self-employed – 1066). Under the bill, loans can be used to meet payroll and cover certain other expenses such as electricity and water utilities or even insurance premiums.
The 2 main funding sources are the Small Business Administration (the “SBA”) . Economic Injury Disaster Loans (“EIDL”). Loan applicants can provide up to $10,000 to cover immediate payroll, mortgage, rent, and other specified expenses. This grant does not have to be repaid. A business that receives an EIDL can apply for, or refinance its EIDL into, the forgivable loan product.’
The first amazing point about the EIDL is by applying for business support, regardless if granted or declined a loan, you’ll get $10,000. We have a full blog at https://clickconvertmarketing.com/small-businesses-get-free-10000-just-for-applying-for-loans-in-cares-act-coronavirus-relief-bill/
The unfortunate update since I wrote this blog last week, is that the $10K has been watered down for most people to $1200. Yes, too many people have applied so most are only getting a mere $1200. It’s a joke.
The second major loan you can apply for is the The Paycheck Protection Program, a loan designed to provide a direct incentive for small businesses to keep their workers on the payroll. SBA will forgive loans if all employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities.
You can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. You should consult with your local lender as to whether it is participating in the program.
We have applied for this support via Bank of America. The process was very simple, you will need basic financial data including summary payroll cost from 2019 to 2020. You can obtain support for Utility costs as well, including electricity, telecomm, internet etc. The forms are not very clear but it is our understanding that you add together the average monthly payroll costs (individuals monthly pay cannot be more than $8,333) plus the utility costs.
In an update, Trump and the Fed have been printing money like it’s going out of fashion. There giving everybody money, unemployment benefits have jumped to $15 to $25, but it’s caused a whole wagon load of issues. To be forgiven the loans, you have to retain staff including taking back on those you made unemployed, but many are now earning more on unemployment at $25 per hour! They don’t want to come back. The concern is that loans have to be paid back in 2 years, yet if you cannot get your staff back, you might not be forgiven the loan! This puts business owners in a real pickle – the loans are needed to support your family, the staff won’t return, so you’re just borrowing money to survive whilst staff earn $25 per hour on the back lawn in self isolation. It’s a total mess. Whilst in Europe, including Germany and the UK. staff are kept on and the government pays their costs and grants are given directly to companies.
Whilst not your CPA, I would personally take out the Payroll and Disaster Loans. Try not to use them and only keep them for absolute emergencies, but seek professional advice from your CPA first.
In the UK, there is support being offered via business rates with a £10,000 grant from your local council for those with Small Business Rates Relief. The Banks are supposed to be providing lending support guaranteed by the government, but as of yet I have not seen any movement on this. The Bank of Wales is offering low loan support and the same is true in Scotland. I think the banks are going to retreat and whilst Boris is unavailable, I cannot see anyone strong arming them to help businesses either.
The Furlough scheme permits you to retain staff whilst the government provides 80% funding to cover salary and taxes. Initially this seemed an amazing scheme but as time has progressed, there is no clarity as to when government payments will be received. Many are hoping it will be before the end of April. Late last week, a government minister said that payments could take many weeks and proposed all Furlough workers apply for Universal Credit.
It’s not nice to say but Furlough staff present a real cash flow danger to your business. Many accountants suspect that payments from the scheme will not arrive until late June inline with payments for Self Employed. Should this be the case you have to make a decision regarding payments. Overheads walk on two legs as Felix Dennis once said. Paying staff from your reserves could expose you to business failure and worse full closure. Should payments take even longer than June and the crisis last longer, say into late Autumn, you might not have cash for you to continue running, starting up again or even worse to pay for your own family.
This matter is something only you can make a decision on. The arguments are strong on both sides. I know that many employers find themselves normally in situations where staff have moved onto a new job, without any regard for the training and investment made by you into them. Yet, now these same staff, whom many will have been with you less than a year, expect you to make the furlough payments from your savings. In addition your revenues are likely to be down for many months after you return to normal working and their jobs might not exist any more. I’ve spoken to many owners recently who have found themselves back on the shop floor after many years. They are discovering the business process have not been followed and are beginning to question the staff levels they previously financed. It would not surprise me to find even in businesses that experience little long term revenue loss that staffing levels will be reduced.
On the other hand however, you have spent years building up your team and the last thing you need is to lose your key people. You may feel that it is worth the risk continuing to pay furlough staff from savings, but do keep an eye on the situation – you must not run out of funding.
If it helps, HMRC are providing 3 month payment holidays for PAYE, Self Assessment and Corporation Tax. I would take up these offers if you have been affected by the crisis. They have a web chat you can contact them on. Get in early in the morning as it’s very busy. https://www.tax.service.gov.uk/ask-hmrc/webchat/payment-problems
The Mothball Approach
If you have the financial resources, you can mothball your operations and ride out the storm – it may be a sound option. My concern is that you as the owners might receive a forgivable loan or government aid, but how long is that going to last before you start eating into your cash reserves? You are faced with difficult choices. You will have worked so hard to put aside money and to have it all disappear during a mothball when you know how hard it will be to earn back is a difficult choice.
I have been reviewing all our clients accounts over the past few weeks and having discussions regarding this. The surprising thing is that many of these accounts are seeing very little change to the traffic they are driving into their business. In fact those who traditionally try to drive footfall to a physical store are seeing great increases online. From these discussions we would recommend rather than completely mothballing the business it may be worth considering some sort of brand maintenance to ensure your position when we get through to the other side. It will be easier to maintain a strong position than to try and battle it out with everyone else when markets start to open once again.
As a update to this blog I wrote over the weekend, there appears to be many businesses questioning if they closed too soon, particularly those who cannot undertake home working. This week has seen a return to work by many businesses, but with increased Personal Protection Equipment for staff.
In addition to the above advice I would also suggest that maintaining a good credit record will be vital for the future. Do all you can to ensure your credit profile stays as positive as possible.
You may have a credit line or overdraft with your bank, but consider that this credit facility could be pulled at any point. Would that push you into closure? Now might be the time to change an overdraft into a loan, especially if you can get the Government backed low rates.
Be VERY CAREFUL if your business owns property or has other business assets that others may eye with greedy eyes. The fall out from 2008 was that your friendly bank often turned on you, forcing you to give them your most important assets. A quick Google will reveal case after case of the banks exploiting business owners forcing assets sales to banks or associates. In my experience and most of my friends too, during the 2008 recession the banks were not anyone’s friend.
Sales are vital. If you have closed the business and you have no sales, in truth you’re not in business. The biggest reason I was able to survive 2008 was a near obsession with sales. In truth it scarred me. Whilst others built agencies around branding and creativity, I based Click Convert around driving sales for clients – lets hope business still want sales during the crisis.
Answer the phone
Yes, answer the phone, your business existence is on the line, and nobody thinks to answer the phone, it could be a sale, someone with a smart idea to save you, you never know. I’ve ordered a few things whilst in lock down including parts to fit a wood fired oven in the kitchen. The number of businesses not answering the phone is alarming I understand some businesses may have to close temporarily but when they appear to be still advertising make sure you take advantage of every sales opportunity. I and probably others will ring to check if you are still open before paying by card. I do not want to risk payments being taken only to find the business closes. So – ANSWER THE PHONE, I found out that customers don’t live under the desk but often can be reached at the end of the phone.
Sales, Sales, Sales
I would urge everyone to do everything they can to continue to generate sales. If you only manage to create a small amount of revenue, it might be the difference in 6 months or even 12 months between success and business closure. Re-examine your recent decisions, did you overreact? Could you continue sales operations remotely? How about setting a VOIP phone system so all in the business can still work. Get just one person or you as the owner to handle physical order processing, packaging and dispatch.
The lesson that 2008 taught us all was that marketing and sales were king. No income, no business. I am not advising you to engage an agency to create a new site or engage in conversion rate optimisation as that would consume valuable cash reserves. During a time of upheaval the figures would be inaccurate. But, you do need to continue marketing, infact Sales and Marketing is going to be key. We have seen a huge decrease in advertisers and rates have fallen, but clients that are still running and adverts are creating sales and cash. When the lock down finishes, many advertisers will find it very difficult to restart pay per click successfully. The AI systems at Google and Facebook do not like advertisers stopping. My advice is review your marketing. I have said this for years, too many marketing agencies and professionals are not experts at pay per click advertising. Now is the time to seek out Pay Per Click Experts. You could consider Click Convert as a small hint.
We will see a huge explosion in business closures. Generating sales will be your top priority in 2020 and probably in 2021 as well. Look at inventory, do you have products that could still generate sales. Don’t accept excuses from your team – this includes “we cannot get them delivered”. There will be companies willing to deliver for you.
Try and clear down as much inventory as you can. Don’t invest in slow moving inventory. Do leave a level of inventory for when the lock down finishes. Remember the supply chain for new inventory could experience huge delays. Post lock down, the value of your inventory may rise.
On the flip side, you may be a retail store stocked full of summer inventory. The lock down may go on longer than you think. The last issue beside a global pandemic you want is to reopen in late September with only Summer stock and no Winter Inventory.
Solution? You could consider selling inventory on Google Ads or Ebay. If your home is a fair distance from your store, bring back some of the inventory to sell from your home via your website, Amazon or Ebay.
Trading at a Loss
Be careful not to trade at a loss for too long. I took orders at below cost in 2009 and ran up debts that took a long time to settle. It was a mistake that I would not make again. I know the temptation is to think things will get better, but trading at a loss can have huge financial risks that can trap you in a business for years with no real hope of business survival.
You’ll either be renting or you own your own property. Retailers may be able to get assistance with a one off grant from your local council and those qualifying for small business rates relief can get £10,000 per premises – maximum 2 locations. For those renting the big question is going to be how are you paying the rent? What happens if you cannot make the rent. I would recommend contacting your Landlord in advance of any payment issues to see if they will agree to a reduction or payment holiday. Hopefully your Landlord will be accommodating, but what if they are not and are playing hardball? They may have their own issues with meeting mortgage payments etc… Ultimately, commercial landlords have rights and these include seizing assets at the premises you rent.
So what happens if they seize your stock and equipment? they might just change the locks. Consider these points carefully. If you’re a smaller business you may want to relocate your stock and equipment to a new storage location so you still own it upon restart. If you are an office based business, it may apply to you too. You might consider putting your IT hardware at a minimum in safe storage, in truth most of your office equipment is probably sitting in the homes of your staff.
If you’re a landlord, it’s a difficult position. In many countries tenants have been given a guarantee that they cannot be evicted. This is great news for genuine families, but there are many who are just telling their landlords they are not paying even when the rent is paid for by the Government and taking the money. This puts landlords in financial difficulty and often mortgage default.
Cash in the Bank
Cash or your bank balance will become your obsession. Monitor it very closely, you need to check it first thing each and every day. Create spreadsheets if you haven’t already to record money received.
Create a projected cash flow sheet with actual spend columns. It is vital that you understand your cash position.
Stay on top of your invoicing and how long customers take to pay. You will need to walk a tightrope act between sales and managing prompt payment by customers. You are not their loan facility or bank. Do not give credit to new customers unless you absolutely have to do so. Ensure that your business survival is not threatened if they default. Try and reduce the time customers take to pay, even if you only succeed with 25% of customers you have increased your reserves. I would recommend credit checking all customers if you provide credit.
I would amend your terms and conditions as well. Include a clause that makes the business owners and directors personally liable to your business should their business defaults. Whilst on the subject of personal guarantees (this may seem to contradict the previous point however this is about what is best for YOU), do not give any personal guarantees unless it is an absolute last resort. If you have to sign a guarantee ensure it has a very clear limit of liability that includes all and any debt recovery costs.
Factoring is discussed often in a crisis and it might seem to be the best option to increase cash flow, using your receivables as a credit source. Deloitte explains it as “With this technique, you are essentially paying customers to provide you with short-term financing”. But the cost may be substantial: a conventional “2% net 10” early payment discount translates into a 36% APR.’. Personally I would use it only as a last resort , the interest charges are too high and strips too many businesses of profitability.
. The classic approach with payments in a crisis is to extend payment terms for your suppliers. Such an approach is likely to damage your supply relationships. Even worse, it might deprive supply chain partners of the cash they need to maintain their operations, which could lead to late deliveries and quality problems, never mind the added strain to these relationships. We recommend working with suppliers to establish an agreement that both of you can live with. Be aware there might even be situations where you need to accelerate payables for a critical supplier that is on the brink of failure in order to preserve the integrity of your supply chain and prevent a critical disruption.
Review your bank records for the past few months looking out for payments you have overlooked. Small payments here and there can suddenly mount up. Cut all expenditure that isn’t related to sales, marketing, production and delivery. See if you can reduce your payments to your accountant. It’s April and it’s a new tax year, could you get Sage or Quickbooks to reduce your payroll expenditure via third parties.
You may have signed up for a whole host of services you rarely use, cancel those services.
If you advertise on Facebook, Google Ads or Bing, see if you can cut costs whilst maintaining sales. We’re always here to provide free reviews.
Whilst reviewing all expenses, have a heart – perhaps the window cleaner has lost all his clients so consider keeping on smaller business without jeopardising your situation.
DO NOT spend a lot of money on a new website. I’ve seen agencies pushing now is the time for conversion rate optimisation, a website upgrade or a new website. This is commercial suicide unless you a well financed. Cut back expenditure on website development. I know that support for Magento 1 is ended but I know of a whole host of third party support options. It is open source after all.
See if you could reduce your hosting costs. Look at company mobile phones, see if you can downgrade your plan.
Business Interruption Insurance
You should understand existing business insurance policies and the coverage they have in the event of a significant business disruption. Such insurance generally covers losses arising from disruptions to a business’s customers or suppliers. However, the breadth of coverage can vary significantly by insurer policy, industry sector, and geography. In addition, due to the insurance losses from the SARS epidemic, some insurers have included specific exclusions for losses arising from epidemics and pandemics, which you’ll need to understand if this is the case in your policy.
Consider Selling Your Assets
Businesses can often sell assets and lease them back. You are swapping fixed cost for variable costs. Work out a cost benefit and see if this is a valid option things like machinery, IT equipment, vehicles etc are all available to lease for businesses so definitely worth a consideration.
I know there are probably many things here that you are already doing or have considered but I hope that there has been at least one bit of information that will help you and others through this most difficult of business times.
If you have any questions or just want to chat to someone outside your business about what is going on and run ideas past a person that isn’t too close to your problem please feel free to contact us here at Click Convert We are here for businesses no matter what and we want us all to pull through.
Click Convert was founded as a result of the 2008 Financial Crisis to provide digital marketing and business advice through our mentoring programme. It was incredibly successful for business owners.
It provided a way to see under the hood of your marketing when money was very tight, ‘Stop the Bleed, Stabilise and Recover’ was the programme. We are going to relaunch mentoring with round table sessions hopefully with other business owners, we will meet up twice a month to get you through this crisis. I recall it helped with the isolation and not knowing if you were the only business going through the storm.
I am offering you an early bird fee of just £285 / $365 per month with limited availability. Just fill in the from or call in the Uk 01244 470067. I hope you can join.