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Zero Cash Date is getting close. What to do?

May 30, 2016
Zero Cash Date is getting close. What to do?

No matter how well things may seem to go for your small business (ongoing projects, possible new deals, interesting prospects), there is a particular moment every manager should pay great attention to — the Zero Cash Date.

What does Zero Cash Date mean?

The Zero Cash Date is an important metric — especially for startups — which indicates the most probable day when your company runs out of cash at the current cash burn rate. Though it may seem that it is meant to cause anxiety, it actually proves useful in de-stressing managers and employees. How come? Due to the predictability that it bears; meaning that once the ZCD warns you about the starting point for negative cash flow (more expenses than income), you have the time to build an action plan and avoid it.

Zero Cash Date is not a fixed, recurrent date in your calendar. It varies according to your income and expenses flow. This is why you need to constantly check your cash flow and calculate the ZCD periodically. The sooner you are aware of it, the more time you have to plan and act.

Should I keep it to myself or share it with others?

Zero Cash Day is not something to be ashamed of (certainly not); moreover, it is a good indicator that helps managers and employees better understand what they need to do and why. If you need to cut up expenses, employees will be less reluctant knowing that, otherwise, the company runs out of cash soon and this means trouble for everybody. It is also an impulse for the sales team to get more active to close deals and cash in.

ZCD exists for every company, no matter how large or small; it is only a matter of distribution over time. For some, it may come sooner, for others later. It is a forecasting metric — it shows when you run out of cash if you keep the current burn rate and no cash revenue (rely only on the cash reserves). However, having this in mind, you can change the burn rate and boost the cash income, so the Zero Cash Day moves later in the future. It is a warning about what may happen if you don’t change your current cash flow.

So what can you change?

There are two main actions you can take: reduce expenses and increase cash income.

Acting on expenses:

Reducing direct costs is a good option, especially for low-margin businesses. You can re-negotiate discounts from your suppliers or find others with better offers.

Re-evaluate expenses. Prioritise expenses and let go those which are not of main importance for your business (such as some convenient goods). Don’t be afraid of your employees’ bad reaction. If they know and understand the purpose of this reduction (and its temporary state), they may be supportive and get their own coffee or remember to turn off the lights when leaving a room, for instance.

Let go of unprofitable revenue streams. As odd as it may sound, making no profit from some of your operations means uncovered expenses. If those activities are not strategically important, consider shutting them down. It will save you a great deal of money (especially cash).

Delay major investments. If the Zero Cash Date is getting close and no income shines in the horizon, you should consider putting on hold the redesign of the office or the equipment renewal (unless it is falling apart). Consider using all the available cash to support your activity until you start generating revenue and have a sustainable activity.

Acting on cash income:

Sell in cash. Bill sooner. Encouraging your customers to pay in cash right away is great for your cash flow. If they don’t have this habit (or your activity profile does not support it), you can bill sooner and/or re-negotiate payment dates. If, say, you gave your clients a 30 days term to pay your bill, you can reduce it to 15 days. Some may even be willing to pay it right away.

Additional funds. Going for a loan or fundraise is another option to counterbalance the high burn rate. Make sure, however, to take this option only after you’ve tried everything else. Having a loan in times when income is not certain/constant and expenses high is not a good idea. Not to mention it may signal instability to potential lenders.

Refinancing debt. If paying loans is one of the major cash expenses, you can negotiate refinancing that loan. You can obtain lower payments and some extra cash to help you get through the negative cash flow period. You will still need to focus on your operations to rebalance that cash flow, though.

All in all, Zero Cash Date is not something to be frightened of. It is a usual, yet important metric. Make it your friend and use it to plan ahead and act so you never have to actually face that date.

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