3 tips for financial resiliency and business survival

Entrepreneurs can make their businesses more resilient with sound cash management.

In brief

• Many business closures directly result from poor cash management tactics.
• Knowing the phases of disruption can help entrepreneurs apprise how financially resilient they are.
• Business leaders should prioritize building a reserve to fall back on in case of hardship and embed cash-conscious behavior into every employee.
  

Entrepreneurs frequently ask me how they can make their businesses more resilient. I tell them that sound cash management plays a critical role as most mid-market companies typically function with just a 30- to 90-day liquidity buffer, without rich balance sheets, extensive credit lines or lots of cash lying around.

Any number of situations can set a business back: competitor innovation, inflationary pressure, a pandemic, supply chain disturbances and more. Regardless of the sector a business calls home or what product or service it offers, entrepreneurs need to confirm that their companies have ample cash lifelines during disruptions.

From watching companies go through ups and downs throughout my career, here are my top three tips for financial resiliency and business survival.

1. Be aware of and avoid common cash management fallacies

According to analysis of data from the Bureau of Labor Statistics, more than 18% of businesses fail within their first year and 50% within the first five years.1 While I can’t speak for every company, in my more than 25 years of experience, a great many business closures directly result from poor cash management tactics that leave a business without good options and, therefore, the inability to overcome macroeconomic challenges.

During the height of the COVID-19 pandemic, there was massive disruption to the workforce, supply and demand. For some companies, that meant sales and cash evaporated overnight, while at the same time, their sources of capital dried up. You can’t run a company without customers, and you can’t satisfy obligations without liquidity.

Too often, ambitious entrepreneurs pour their energy into making their products or services more competitive at the expense of managing net working capital: accounts receivable, measured as days sales outstanding; accounts payable, or days payable outstanding; and inventory, or days inventory outstanding. They don’t make sound cash management a priority and leave themselves vulnerable to disruptions, such as a pandemic or a down market.

As my colleague Peter Kingma said, “The balance sheet is your suit of armor in turbulent times, and if it’s strong, it gives you the opportunity to respond in ways that others can’t.”

It’s harder to see the impact of resiliency efforts if you’re only looking quarter to quarter. For some companies facing shareholder pressure or other calls for an immediate return, this can create conflict with the need to generate short-term profitability. However, underinvestment in maintaining your balance sheet can lead to failure.

It falls to leadership to understand this and strike a balance; no one will enjoy returns if the business has zero operational resiliency.

2. Know your position in the different stages of a disruption

The wider business community categorizes resiliency according to the various stages of a market downturn and into three phases similar to how government agencies categorize natural disasters: prevention, response and recovery.

The stages are as follows:

3. Inculcate cash-conscious behavior into your company

It all begins with leadership. The founder and executive team must prioritize building a reserve to fall back on in case of hardship, either by setting aside a lump sum for an emergency or building up that total over time.

Leaders also must embed cash-conscious behavior into every new hire, business department and executive, especially during times of high inflation. Analyze the business’s expenditures; what made sense a year ago might no longer be the best choice. Is it time to consider other options? Empower the CFO to ask these hard questions as doing so benefits all employees and stakeholders mutually.

Lastly, confirm that leadership has visibility and control over cash flow through regular updates and check-ins, which will help spot issues before they begin or mount. This will also help the company focus on the cash conversion cycle, pricing and improving long-term cash forecasting rather than pouring all its energy into the product.

A lack of financial resiliency is an active threat to the survival of a business. The winners of their time are companies that can execute successful resiliency turnarounds because they studied and avoided resiliency fallacies, understood the stages of a disruption, never shied away from the innate courage and optimism that encouraged them to start their business, and entrusted leaders who weren’t afraid to prioritize business resiliency over short-term profit.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.

This article originally appeared on the Forbes council [Financial Resiliency: The Key To Business Survival (forbes.com)].