Key takeaways
- A playbook is a decision made in advance about who does what once the numbers reach a given point, before emotion and time pressure set in.
- Triggers should be numbers you can see before the cash runs out, such as bookings, cash days and covenant headroom.
- Order measures from those that are reversible to those that are irreversible, and do not count conditions the bank has not yet agreed to as cash.
The economy starts to slow and this month's bookings fall. Sales says it is temporary. Finance starts to worry. The owner does not want to cut anything for fear of demoralising the team. Two months later bookings have not recovered, and the same decisions now have to be made with far less cash than before.
A prepared company is not one that predicted the economy correctly, but one that agreed its plan on a day when it could still think clearly. Checking the lifeboats should be done in fair weather, not when the waves are coming in.
The basic runway calculation is covered in the article on sales down 30%. This page builds on it with a trigger system and a decision sequence.
Designing the four plans
| Plan | Example conditions | Decision-maker | Measures |
|---|---|---|---|
| A Watch | 3-month bookings down 10% | CFO | Weekly cash forecast; review receivables and new POs |
| B Preserve cash | Sales down 20%, or cash days below the threshold | CEO | Freeze hiring, defer non-committed CAPEX, control discounts |
| C Restructure costs | Sales down 30%, or headroom nearly exhausted | Board | Cut fixed costs, sell secondary assets, talk to the bank in advance |
| D Survive | Sales down 40%, or cash shortfall within 13 weeks | Board | Close loss-making units, raise equity and negotiate a debt restructuring |
Example: calculating the effect of each plan
Hypothetical example: normal revenue of THB 20 million a month, contribution margin of 45%, fixed costs of THB 7 million, debt service of THB 1.7 million a month, and cash of THB 30 million.
| Case | Revenue | Contribution | Fixed costs | Debt service | Net cash/month | Runway (months) |
|---|---|---|---|---|---|---|
| Performing | 20.0 | 9.0 | 7.0 | 1.7 | 0.3 | - |
| Sales down 10% | 18.0 | 8.1 | 7.0 | 1.7 | (0.6) | 50.0 |
| Sales down 20% | 16.0 | 7.2 | 7.0 | 1.7 | (1.5) | 20.0 |
| Sales down 30% | 14.0 | 6.3 | 7.0 | 1.7 | (2.4) | 12.5 |
| Sales down 30%, fixed costs cut by 1.0 | 14.0 | 6.3 | 6.0 | 1.7 | (1.4) | 21.4 |
| Sales down 30% and bank reduces instalments by 0.6 | 14.0 | 6.3 | 6.0 | 1.1 | (0.8) | 37.5 |
| Sales down 40%, no measures | 12.0 | 5.4 | 7.0 | 1.7 | (3.3) | 9.1 |
| Sales down 40%, fixed costs 5.0, bank reduces instalments | 12.0 | 5.4 | 5.0 | 1.1 | (0.7) | 42.9 |
The runway for any line that depends on the bank is only an assumption until there is a written agreement. It must be shown in reports separately from measures the company can take itself. This calculation also assumes constant revenue; in reality cash may tighten faster because customers pay more slowly.
Order of measures
- Collect the money that is due: receivables, tax refunds and saleable slow-moving inventory
- Stop spending that is not yet committed: new CAPEX and marketing whose results cannot be measured
- Talk to partners and the bank: before any default, using numbers and a plan
- Cut fixed costs: premises, contracts and loss-making business units
- Sell assets or raise equity: before the cash runs out, because time is bargaining power
Labour measures, such as pay cuts or redundancies, carry legal conditions and compensation, so take expert advice first. Protect the people and teams who are core to the recovery as well; across-the-board cuts may remove the parts that earn money.
How to communicate when a plan is activated
When a trigger is hit, each group of stakeholders needs different information. Employees need to know what is changing and what the company is doing. Customers need assurance about delivery. Suppliers need to know when they will be paid. The bank needs to see the numbers and the plan before it hears the news from elsewhere. Prepare the key messages in advance and name clearly who will communicate them, so that no group receives inconsistent information.
A trigger system must define both entry and exit. If bookings recover for only one month, do not rush back to spending as before. Set exit conditions, such as how many consecutive months of improvement are required and what level headroom must return to. Irreversible measures, such as closing a branch or selling an asset, must go to the board for consideration together with the alternatives.
Do not cut everything to the point of destroying the recovery in revenue. Divide spending into three groups: what sustains current revenue, what creates opportunities after the crisis, and what can be cut. A high-performing sales team or a collections system may be worth keeping even during cost-cutting. After the crisis, record which triggers gave timely warning and which measures actually worked, and revise the playbook for the next cycle. A plan that has never been tested should be regarded as no more than a draft document.
Next steps
- Choose 3-5 triggers that show up before revenue and cash change
- Build scenarios for the four plans, with their effect on cash and covenants
- Define the decision-maker and the decision deadline for each plan
- Separate measures the company can take itself from those that need others' agreement
- Prepare the information for talking to the bank before cash gets tight
- Rehearse decision-making with the management team once a year