It is quite possible to be a fast growing, profitable company and still end up insolvent, although it is rare to find a company that is well-managed with an eye towards cash-flow and working capital to wind up in that position.

It has been a long-standing mantra that private firms should be managed for cash, but more and more savvy public firms (and investor) are benchmarking using “Free Cash Flow” as a metric. Simply put, this is cash flow from operations found on the cash flow statement in your financials minus capital expenditures. Looking only at an income statement can mask operating deficiencies and other issues. If a company has cash left over after making needed investments then it is probably sound, if free cash flow is negative, then the business is not generating sufficient cash to be sustainable.

At no other time in my 35 years of turnaround advisory has the need to manage and control cash been more critical to most manufacturing small and medium-sized enterprises (SMEs). In early June, Strategic Early Warning Network (SEWN), in collaboration with the Manufacturing Alliances of Bucks and Montgomery Counties, did a statewide survey to gain a snapshot with 173 respondents from veteran business leaders. When asked how their operating cash position looked projecting to the end of June, 51% stated it was either tentative or they did not have enough.

I’m often surprised how many companies have to guess at what their break-even is. For those who know from a profitability standpoint what sales level they need, it is imperative now to take it a step further and know what your cash breakeven is.

In this crisis, similar to that of 2008, many companies saw an immediate drop in revenue. If you rely on a Line of Credit (LOC), it is important to understand the terms of that loan.  Many LOCs have a cap, say $1M, but that is merely a maximum. Often the amount available is set from a ‘borrowing base’, typically your accounts receivable and inventory. The lender sets an advance rate as a percentage of eligible assets and then defines what is eligible.  As sales dry up so do Accounts Receivable and likewise as others fight to conserve cash they may age to the point where they are no longer eligible collateral to borrow against and that full $1M may not be available.

Finally, a 13-week rolling cash-flow forecast is an important tool for managing cash if a company is below or near its cash breakeven point or is experiencing working capital issues.There is a lesson to be learned from those who lived through the hard times of the 1930’s and kept cash stashed in their mattresses. They understood that cash is king in the best of times, but especially in the worst of times.

Written by Bob Value, Deputy Director, Steel Valley Authority


Steel Valley Authority is partnering with NWIRC and other regional organizations to help businesses recover from the pandemic via the COVID-19 Recovery Program (CRP).