A few days ago, I received an email from a small business I am involved in asking for ideas on how to respond to the Coronavirus market cash-crunch. This business is a spirits producer in Southeast Asia and generates its revenues from:
- On-premise sales to bars & restaurants
- Off-premise sales to retail stores
- Export sales to other countries in Asia and Europe
All three revenue streams have essentially been closed since March due to local quarantine policies, the disappearance of travel tourism, and trade decline.
I responded to this email with a few suggestions based on an experience I had lived through while managing a start-up beverage business in the U.S. a few years ago, when we were hit by a hurricane that caused a temporary closure of the local market.
I will structure this post by first summarizing the situation we found ourselves in, I will then give a brief overview of the importance of prioritizing the cash-flow statement, and finally I will share the recommendations I came up with for the aforementioned business.
This post isn’t meant to be a history lesson, so the quick and pertinent summary is that in 2017 Hurricane Irma hit the state of Florida and large portions of the state were affected with widespread electrical power outages that lasted several weeks.
In our case, we had a beverage manufacturing facility where we produced and distributed beers and ciders, as well as an on-site bar where we sold beverages, food, and entertainment services. Without electricity for two weeks we found ourselves in a funk for the following reasons, to name a few:
- We had hundreds of gallons of finished product inventory that needed refrigerated storage.
- We had thousands of gallons either in fermentation or conditioning tanks that needed refrigerated storage.
- All our clients (bars, restaurants, retail) and distributors where closed because of the power outage.
- We had the typical fixed costs that included property rent, insurance, salaries…etc.
Sound familiar? Maybe, and that is because millions of businesses around the world are going through the same situation, not only in the beverage industry, but in all industries with their particularities.
The three main financial statements in business management are:
- Profit & Loss (P&L), or Income Statement ® Revenues and expenses
- Balance Sheet ® Assets, equity, and liabilities
- Cash-flow ® In-and-out flow of cash
Each statement plays its fundamental role, and these roles can change the business grows or enters a different cyclical period. For the typical small business that has little access to credit lines, the cash-flow statement plays an increased role in decision making. If you run out of cash, you run out of business. On the other hand, the P&L manages margins that can fluctuate up and down with lesser correlation to survival. The balance sheet is interesting because the information presented can give you lots of tools with which to negotiate your cash position in times of crisis, so to speak.
So, in conclusion, for small and start-up businesses cash flow is usually the first statement to base your decision-making on, and the balance sheet is the second statement you refer to as a source of inspiration for ideas.
Ideas and Inspiration
Because we were a small business that was run by the tides of our cash-flow statement, we already had an advantage going into the natural disaster: we knew our cash levers blindfolded. We put aside our income statement, understanding that we had flexibility in our margins to tug-and-pull our cash-flow, and we got to work on our financial creativity with our balance sheet and cash flow statements.
Based on our experience with the hurricane, here are the suggestions I shared with friends in Southeast Asia. I contextualized a few of them to the current situation and describe the inspiration to a few of them.
- Time-Sensitive Programs
- As an alcohol manufacturer, re-direct resources to create hand sanitizer with existing bulk alcohol. This can be used in two channels: donation and sales. Several beverage companies have been doing this.
- New services: The production team are experts in sanitation, given they sanitize manufacturing, cellaring, and bottling equipment every day. As such, the business has a large inventory of industrial cleaning products. With the necessary tools and expertise, create a service package of sanitation cleaning to other businesses and /or government installations. This can be done as a way of substituting salary commitments to production staff, instead of furloughing, or as a new revenue-generating stream.
- During the hurricane, we made a community call for donated water, food, and medicine which we would transport in our truck to the more exposed islands off of Florida. We received two truckloads of donated equipment and generated positive community sentiment.
- Financial Creativity
- We renegotiated our property lease. We asked for three months’ rent pause and committed to amortize that new debt the following year with a 10% interest. This depends on certain contract clauses including collateral negotiations.
- We designed a “receivables call” where we called all our clients with a pending receivable claim from us and offered a special price discount for early payment. This can also be designed with a combination of cash, in-kind, and future credit packages. This idea was born by seeing our “receivables” account in the balance sheet.
- We did a lease-back of some manufacturing equipment with a specialized bank based in the U.S. We received a bulk purchase transfer, and we would pay off monthly lease with interest. We did this to increase our cash reserves, and as soon as business normalized, we paid back the equipment without early termination penalties. The risk-reward between the interest commitment and increasing our cash-cushion was worth it. This idea was born by analyzing the value of assets in the balance sheet.
- The obvious route is to increase cash reserves via credit lines, government emergency grants, and investor capital-calls. These depend on the nature of each business and are highly contextualized to each case.
Have you ran a small business through a crisis before? How did you adjust or innovate?
Enrique Jose Garcia is a GovLoop Featured Contributor. He was born from Cuban parents and was raised in Venezuela until moving to the U.S. to attend university. He has spent most of his career as an entrepreneur in the beverage sector, both in the U.S. and in Cambodia, and most recently started a Master’s at the London School of Economics in Public Administration and concentrating his studies on Social Entrepreneurship. He currently spends his time between London and Colombia and writes for a few publications on economics and entrepreneurship in Latin America.