I’m dating myself, but when I was in college, online poker was becoming a “thing” and the World Series of Poker was gaining in popularity. Hence, I played a lot of poker in college. Poker financed most of my entertainment money in college, as well as most of my (now) wife’s engagement ring shortly thereafter. At a high level, there are two types of play: tournaments and cash games.
Tournament poker
In tournament play, each person buys in for the same amount and is given an identical number of chips. The blinds, or the minimum cost of playing a hand, increases over time and whoever has all the chips at the end wins. In tournament play, ideally you’ll increase your chip stack quickly and maintain a reasonable level of aggression. If you gain a large chip stack and sit on it, eventually the blinds will eat away at your advantage and competitors will pass you by as players exit and the chips consolidate to remaining players. The less chips you have relative to the average of everybody else, the less you control your own destiny. At some point, you will be blinded out of the game and you’ll need to make wild bets based on your best available opportunities.
Cash games
Cash games are very different. In a cash game, you choose the limits, or blinds, and they remain the same throughout the game. There is generally no minimum to buy in. However, there is a maximum amount. For instance, at a $1/$2 no-limit game, generally the most you can but in is $300. Buy in for less and you’re immediately at a disadvantage. However, in a cash game you have the opportunity to sit black and play when you have good cards and/or when opportunities best present themselves due to your position at the table. You control your own destiny.
Now, hold that thought for a minute.
Coronavirus, aka COVID-19, and the “new normal”
As we’re all aware by now, the COVID-19 pandemic is upon us and it’s going to be with us for the foreseeable future. We’re all dealing with a new normal, such as:
- “Social distancing”
- Homeschooling kids (who, for some reason, never wear pants) while working full-time
- Working remotely
- New co-workers, such as your spouse
- Sheltering in place, and
- Toilet paper shortages
The 2008 financial crisis
I was a new staff accountant back in 2008, working in a forensic accounting firm. The day after Lehman went bust, I’ll never forget it, the partner in our office called an all-hands meeting. In that meeting, he told us the world had changed and our calculations needed to include “pre-Lehman” and “post-Lehman” demarcation points. I remember the financial crisis well. I was in Baton Rouge, Louisiana for most of it, auditing an insurance claim due to Hurricane Gustav. For most of that time, I was glued to CNBC on SiriusXM radio. I was away from family and friends and had nothing else to do. All day every day, was a ridiculous reality show in the markets.
Fast forward to today…
We are experiencing an unprecedented pandemic, yes, but also an unprecedented shutdown of the world economy. In late 2008 and early 2009, I could still go into the office, go down to the street cart for an egg and cheese in the morning, walk next door and get chicken fingers for lunch (don’t judge my early-20s eating habits) and then go home when the day was done. If I were still working in Center City Philadelphia that routine would be laughable today. Worse yet, assuming those establishments are still in business, will they be in business next week? Next month? In 6 months? Time will tell.
We are entering a period of uncertainty and difficult business conditions, for sure. Things are changing rapidly, in a lot of cases, by the hour. Given the uncertainty and what we know right now, these are the 5 things we are telling small business clients:
Plan for this to go through July
Nobody knows for sure how long this new normal is going to last. What I do know is, as I type this, school is closed in South Carolina through April. It’s only March 24th. Conferences that we were planning to attend in June have also been cancelled. China, depending on the news source, is still dealing with the virus and they’re at least 4 months in. Therefore, I think it’s fair to say this could take us 4 months or so (July) to deal with. It’s a good idea to prepare your business and your psyche for such an eventuality. It’s likely only “essential businesses” will be allowed to operate during this time. Pray for the best, prepare for the worst.
Hold and get as much cash as you can
One thing I know for sure, we are only in the 1st inning of the economic ramifications of the pandemic. We’ve never seen a global shutdown of this magnitude — ever. Only two weeks in, we’re already seeing layoffs and business closures are already happening. Supply chains don’t just turn on over night, either. The other thing I know for sure: You can’t pay employees or your mortgage with a credit card. Or in bitcoin. Or in tulip bulbs. You need cash for those things. As business slows down and accounts receivable (AR) cycles become longer, your business is likely to have cash.
One thing you can do today, while the crisis is still young, is to try to collect on open receivables. That’s free money — you already did the work, and you need the cash. Other options:
- Open a line of credit at the bank. This is there in case you need it, and it’s always better to apply when you can, not when you have to.
- Consider an SBA loan. The SBA is offering low-interest Coronavirus loans to help cash-strapped small businesses.
I’d be remiss if I didn’t mention this is why we strongly encourage business owners to maintain a cash reserve at all times. A cash reserve will help you weather storms like this. At the very least, the pandemic should enforce the need to build and maintain a cash reserve once we’re past the storm.
Need help determining the appropriate reserve size so you can start planning? Check out our calculator here.
Think creatively about alternative revenue streams
If your primary source of revenue dries up — for instance, if you provide marketing services to local hotels — it’s time to think creatively about how to repurpose your skills to drive revenue. This will also help to augment much-needed cash flow.
Apply for “stretch projects,” projects outside your comfort zone but interesting to you, on sites such as Upwork. Who knows? Your new venture may even turn into a new and interesting line of business for you. Warning: Don’t confuse “outside your comfort zone” with “totally unqualified for.” Which brings me to my next point…
Use the downtime to upsize skillsets
This very well may be a once-in-a-lifetime opportunity to have a long period of downtime as an adult. Use it to spend time with family, but also use the time to upsize the skill sets of you and your employees. Pick up a book. Take a class on Udemy. Spend time on YouTube (not cat videos).
For my CPA firm, we recently implemented a new online learning solution for staff with customized learning plans. Personally, I am reading Life After Google and also working to implement natural language generation to our financial reporting packages. Before you ask, yes, tax returns are still getting done.
Challenge: Find a topic or skill that’s interesting to you and not applicable to your business currently. Then, learn that skill and find a way to creatively apply it to your business.
Use the time to improve your business
Finally, use this time to make the changes to your business that you “never have enough time” to implement. Maybe that’s updating your policies & procedures manual (you have one, right?). Maybe that means finally configuring that software package that you bought 6 months ago the right way. Maybe it means creating new content for your business. Whatever it is, make sure:
1) it makes your business better, and
2) it doesn’t increase expenses and/or require additional capital.
Hopefully those 5 tips are useful to you.
“Ok, cool. But, I have no idea where to start.”
Start by forecasting your cash flow through July under two scenarios: best case and worst case. Basically, you’re stress-testing your business. In either scenario, do you run out of cash at any specific point? If so, you may have a forthcoming problem. You can solve that problem in one of three ways:
- Increasing your access to cash (i.e. – a loan or line of credit)
- Decreasing recurring expenses. Software is usually the low-hanging fruit, but remember you’re also going to save money on things such as client meals and employee expense reports. The largest opportunity is always in cutting salaries and benefits, but that’s a whole other animal.
- Both
Work through these three options until you reach a scenario where you don’t run out of cash at any point. Then, ask yourself whether or not your assumptions are conservative enough and repeat the exercise. Considering how rapidly everything is changing, I would recommend revisiting this exercise at least once per week throughout the pandemic period.
Now back to poker
The game we are generally playing in life is tournament poker. Gain a competitive advantage early, and then try to accumulate your chip stack until the game is finally over (retirement). Right now, though, we are playing a cash game. Get as much cash as you can going in, and then strategically take advantage of the opportunities as they arise. The goal is to leave the table (pandemic) with more money than you entered it with, or at worst, at breakeven. Now is not the time to be a hero. Now is the time to preserve your position while strategically increasing your advantage through upsized skillsets and non-expense improvements to your business.
Finally, spend time with your family, which is definitely a once in a lifetime opportunity.
Need help forecasting your cash? Send us an email with the subject “Cash Flow Forecasting Help” to get started: Cash Flow Forecasting Help