Surviving a cash crisis - Part II

Steps for using SurvivalWare Transition Planner

There are four tabs of critical information you have to fill in for SurvivalWare:

1.Setup information, including how money you have in the bank.
2. Sales projections
3. Payments - which can be copied in from Excel
4. Receivables - a list of all open invoices

In addition, there are two optional tabs:

1. Collections - you can change the defaults used by the program for how long it takes to collect existing invoices
2. Extraordinary events - special one time events that result in cash coming in or going out

We'll continue the example from Surviving a Cash Crisis - Fundamentals, using the same numbers for payment obligations, but a more refined look at cash coming in.

Note: you can click on any of the screenshots below to make them bigger. Close the new browser window when you are done.

Setup Information

The critical information here is the "as of" date (i.e. today's date), the end date of the first week (I always used weeks ending on a Friday), and the amount of money you currently have in the bank.

You get to put in a company name, and a description - which helps keep things straight when you're trying out different survival strategies. (e.g. "Initial Run" or "Pawn wife's engagement ring"). You can also change the number of "trials", and the time periods used to tabulate the results. I found 100 trials to be sufficient, and a forecast horizon of 13 weeks to be about right.

Sales Projections

Then think about new sales. How have sales been trending? Up and down like a yo-yo? Make your best reasonable guess for the next three or four months; a most likely, a high, and a low.

Also, you need to estimate the number of invoices you send out per month, and the percentage of new sales that are prepaid. Depending on the nature of your business, some sales may not be recorded as sales until payment is received (these would be considered to be prepaid). The estimate of the number of invoices is used to break the monthly sales estimate into a number of chunks, each of which will occur randomly throughout the month. The last piece of information needed by the simulator is how long it takes to collect on those sales.

Payments

For each payment due over the next three months- you need to enter the date, description, and amount due. If you've already done this in Excel, you can just copy and paste. When you are entering the payments directly into this tab, just make sure you use a space or the semi colon (";") to separate the three fields (date, description, amount).

Receivables

If you send out invoices before receiving payment, make a list of all unpaid invoices. Note the date, a description, and the amount due.

Results

When you click on the "Results" tab, the fun begins. First a thick red line is drawn showing the cumulative amount of cash required week by week over the next 13 weeks. (This in additon to what you already have in the bank). Then for each "trial", a thin green line is drawn to represent how much cash gets collected. You're happy when most of the green lines are above the red line. This initial run doesn't look good.

Graphic Analysis

The 4 quadrant graphic analysis shows everything at a glance. The upper left is just a recap of the simulation's receipts vs. requirements. The upper right is the PP Score - which tells you whether or not you have a problem. You want to see a sea of purple on this graph. The lower two charts are two different measures of how bad the problem is.

PP Score

The PP Score is the Probability of meeting Payroll. Actually, it is the probability of meeting all your payment obligations, week by week. "Meeting payroll" is the ultimate expression of entrepreneurial well being. When one entrepreneur asks another "how's business?" -- "still meeting payroll" is the stock answer that means you're still in business.

As an experienced SurvivalWare Transition Planner user, when I look at this PP Score, I think "ouch!" It looks like ACME Software has about a 30% chance of meeting its obligations the first week, and then chances are slim to none for the next 10 - 12 weeks.

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Now what...

Now you have to figure out how to get through this $15,000 - $25,000 "problem". This may take several passes, but unless you have 25 grand buried in your mattress, you have to start somewhere.

We'll start with the low hanging fruit:

1. Pay rent the end of the month in January instead of the 15th,
2. Delay the big $5,000 January payment to Rivulet IT by 30 days,
3. Reduce the contingency for January from $1,500 to $500,
4. Reduce the collection days on new sales from 35 to 15. This may be a stretch - you'll have to be real aggressive about letting your customers know what the new terms are, and following up when payments come in late.

Step 1: Pay rent the end of the month in January instead of the 15th

Result of step 1:

Some major progress - It sure is nice seeing some purple in the PP Score - but we're not out of the woods. There still seems to be a real short term problem of $3,000 to $4,000.

Step 2: The family's not going to be happy, but let's skip the end of January payday for yourself

Result of step 2:

The PP score is looking stronger and stronger, and there seem to be a bunch of positive numbers on the "Shortfall Analysis with luck" chart. But still, the first 2 or 3 weeks look anemic. The challenge is to remove the "valley" in the PP Score in week 2 - maybe by using the "peak" in weeks 4-5.

Since I already zeroed in on the big stuff, it's time to take a look at the little payments due, and shift several of them at once. In the payments tab, you can "mark" several lines of payments with the mouse, and the "Split/Delay" command button is activated. You can then slide several payments into the future all at once.

Step 3: Moving the little stuff

Result of step 3:

This actually doesn't look half bad. With a little luck, we're home free.

Step 4: If you're still nervous..

and also, to illustrate how you might use the extraordinary events tab.. Let's look at the impact of cashing in your meager 401K plan. (I know - what self-respecting entrepreneur still has money in a 401 K plan? It more likely was used to get the business started in the first place).

Of course, if you do still have one, the penalties are high for cashing it in, so do it only as a last resort. We think we know the net amount we'll receive, but there is some uncertainty about when we'll actually get the money - so we specify a range of dates. (Click on "Contact Sensitive Help" to get a fairly decent description of what your options are here).

Result of Step 4:

Now it's time to go back to work. Set this aside for the next 2 to 4 weeks and don't worry about it. You've got three months of breathing room - so make good use of it!

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