As a CFO for small and growing companies, one lesson I’ve learned repeatedly is that cash management is the #1 skill that can make or break a business. 

In my Finance fundamentals series, I’ve provided tools and tips for how you can improve cash management; but maybe you’re still wondering why cash flow is so important; or how cash flow problems actually affect companies. I can simply illustrate this with two stories about similar businesses with very different results. 

How rapid growth can derail a beloved business 

In the early days of CFO on Speeddial, I briefly advised a small cookie company started by a talented team with a fantastic product. In the beginning, they sold directly to consumers at markets and in a few specialty food stores around NYC. After a few years, the cookies were picking up a cult following and the company began landing wholesale accounts up and down the east coast.  That’s when they reached out for help. 

Holiday season that year was truly exciting for them as orders spiked. This turned into a huge problem.

With direct retail sales at markets or online the company was paid directly by their customers at the time of sale. The owners could immediately turn that cash around into new ingredients, new inventory and pay for their kitchen workers and themselves. 

With more and larger wholesale customers they had to buy ingredients and packaging; bake and ship cookies; and then wait at least 30 days for payment.  

The more cookies they sold, the more cash they needed to cover product costs.  

In accounting terms, this is called a negative cash cycle; and it basically means that high sales suck cash out of the business and therefore require lots more cash in the bank  -- also known as underlying financing. 

The company reached a critical point during the holiday season. They had plenty of orders; but no cash to buy ingredients to bake the cookies.

Somehow the team managed to squeak by. With more time, we could have possibly found capital to support further growth. But, the owners made the call to close the company. The stress and lack of cash killed the business.

I still miss their cookies.

Shutting down is not the only possible ending; (hopefully it won’t be yours!) 

When I read about the beloved food businesses facing this same set of choices, I truly feel the owners’ pain and loss. 

 For encouragement, here’s a parallel story with a different outcome.

How to go from cash crunch to cash flow

A few years ago Erica Fair from Sans Bakery came to CFO on Speeddial for help making sense of her numbers. 

Erica was stressed from juggling debt to cover payroll and ingredients. The company was repeatedly using short term loans to keep production going. This is a really expensive way of covering cash needs. Depending on the lender and the terms it can bankrupt a business.

For Sans, recovering from this position wasn’t easy; and it didn’t happen all at once. With consistent focus Erica and Sans Bakery overcame both the debt and the poor cash flow. 

Four Core Steps to Control Cash

These are the actions CFO on Speeddial implemented with Sans Bakery - which you can also use: 

• Refinance high-cost, short-term debt with an SBA-backed loan (payable over 7 years) to stabilize weekly operations; 

• Create a debt reduction plan to eliminate all the other debts the company had been juggling;

• Implement Profit First to manage the flows of cash into and out of the business; build a cash reserve so the company can operate smoothly during seasonal slumps and to self-fund growth; and

• Focus sales on the most profitable customers and products: we worked on pricing, costs, and labor efficiency to improve the profitability of each product and made sure sales focused on the most profitable product lines and channels. 

All of that, plus consistently increasing sales meant that Sans Bakery started the next year in rapid growth mode – looking for space to expand the bakery and hire more team members. 

Then came the COVID shutdown which closed NYC overnight; and crippled Sans Bakery’s largest clients: the cafes and coffee shops that fueled office workers across NYC. 

Like most food and beverage companies, Sans Bakery faced a critical test with the shutdown.   

What to do when COVID brings your cash flow to a shrieking halt

While the Covid-effects on health and the economy are ongoing, Sans is back in rapid growth mode. In December, Sans finally opened the expansion space they were shopping for last February.  

How did they make it through when so many other small food companies are going under? 

A great team, flexibility, and persistence were all required. 

How the bakery recovered from the COVID cash shortfall

Sans ended March 2020 with enough cash in the bank to cover about 4 weeks of payroll; which meant they could stay open and keep producing even after their weekly sales took a huge dive (dropping by more than 50% from February’s sales). Sans also had enough raw ingredients to weather several weeks of the shutdown without having to purchase more ingredients. This meant they avoided the worst of the supply chain disruptions in the spring and saved cash for labor instead of ingredients.  

Sans did have to cut kitchen capacity by half and lay off team members.  But they kept baking. 

When the shutdown happened and we knew the company was going to have to lay off staff I reached out to ask if Sans wanted to hit pause on our CFO Services.  Erica’s reply - “No way! We can’t do this without you!”  so we dug in and got busy. 

First, Virtual CFO  Jamila O’Gilive built a week-by-week cash flow plan to help Sans manage labor hours and ingredient purchases based on sales. This tool ensured that even with low revenue, Sans kept losses to a minimum and never missed a payroll.

For weeks I constantly monitored the federal relief programs and we prepared to submit applications the day funding was available. When the SBA relief programs launched; we updated the cash flow plan to also track the PPP spending-- to ensure that Sans would be eligible for ALL of the forgiveness within the original 8-week timeframe. Jamila also worked with Sans’ bookkeeper to make sure it was all documented properly to make submitting the forgiveness application easier.

Sans got both a PPP loan and then an EIDL. These cash infusions gave Sans the ability to re-hire laid-off team members, buy more ingredients and refill the cash reserves.  

As New York City opened up and cafes reopened, the Sans team was proactive about engaging with customers and letting people know the bakery is ready to produce. Sans also continued to push direct-to-consumer sales online. Sales grew as their wholesale customers re-opened, and new partnerships brought in additional sales.

9 months after the cash plan started

Fast forward 9 months: Sans closed 2020 with overall sales up 10% over 2019.  This is disappointing compared to the more than 30% growth rate in 2019; but in the context of Covid in NYC and the huge hit to their primary customer base; this is a tremendous win!  

There is even a small profit for 2020; although it is $100,000 less than last year.   WHOO HOO!   

The critical part of the story is that because of the relief funding and precise cash management; Sans had more cash in the bank at the end of 2020 than they did in the much more profitable 2019. Of course, the EIDL will have to be paid. But the cash in the bank gives Sans time to focus on growth and development while protecting the company and team from any new waves of disruption.  

Oh, by way.. Sans Bakery does make cookies.  And brownies, doughnuts, and cakes.  All delicious (and gluten-free!) I’m a huge fan of their lamingtons.

What you can do to nail Cash Flow management:

The first step to getting ahead of your cash needs is to create a cash flow forecast so you can build your cash reserve and be prepared for whatever disruptions happen next.

A cash flow plan gives you a fine-tuned, detailed perspective on when cash is coming into -- and going out from -- your bank accounts.  With a clear cash plan, you can see around the corner to next week or the week after and make decisions based on your immediate and future needs. 

Plus, the detailed work required for the cash flow plan will directly inform your understanding of what sales you need to book to support operations. 

Then use our free Revenue Calculator to set solid revenue targets for the next 12 months.

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