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Cash Management in Times of Crisis

Published on:
Updated on:
October 21st, 2020

Fears about economic depression following the pandemic lead most entrepreneurs to restructure their company drastically in order to secure their cash and prevent future liquidity crises. Etienne Krieger, Associate Professor on the Education Track at HEC Paris, explains the main challenges for entrepreneurs when major economic crises occur and their room for manoeuvre in terms of operations and finance. Such crises paradoxically provide a unique opportunity to rethink business models.

cash management ©nakigitsune-sama on Adobe Stock

©nakigitsune-sama on Adobe Stock

Let’s face it: when a major economic crisis occurs, even our previous “worst-case scenarios” are often quite optimistic, since nobody expects that major industries can suddenly stop for weeks. When your order book starts melting down faster than an iceberg hit by global warming, you have to throw away your initial budget and revise drastically your commercial and financial forecasts.

What are the main challenges for entrepreneurs?

My colleagues and I have interviewed many entrepreneurs since the beginning of the pandemic. They unanimously declared that procrastination is not an option when such a major event occurs. Your main challenges can be summarized as follows:

  • Securing upstream and downstream: you will not be able to sell anything if your production chain, including your key suppliers, is down. At the other end of your value chain, you also have to take care more than ever of your existing customers.
  • Resizing the company to adapt to the new workload: such resizing often leads to fixed costs reduction in order to reach your breakeven point even if your turnover is divided by more than two.
  • Adapting to new industrial trends: digitalization, big data, AI are more than buzzwords. Health and/or economic crises will foster flexible and remote collaborative work. You may have no other option than following this increasing need for IT performance and security.


You may have no other option than following this increasing need for IT performance and security.


  • Preventing liquidity crises: entrepreneurs who once faced huge cash shortage understand better than anyone the following statement: “cash is more important than your mother”. In case of a liquidity crisis, nobody will provide you with enough cash to pay your fixed costs unless you have strengthened your working capital and limited your working capital requirements. This implies securing credit lines and daily monitoring of your cash flows.
  • Preserving the essential: when an organization is struggling to survive, its management has no bandwidth available for daydreaming with baroque diversification. The decision to maintain only strategic projects with a short-term income horizon becomes obvious. 

Such difficult decisions are vital to preserving a company’s key assets, including the employees’ motivation and conviction that management has a vision and a clear course of action.


man pointing at a screen with money symbols
©wladimir1804 on Adobe Stock


A major crisis can, therefore, be a unique opportunity to rethink business models

Before and after the coronavirus, a sound business model means having a significant economic, social and/or environmental impact and also generating recurring free cash flows as fast as possible. This is not an ideological bias: at the end of the day, an entrepreneur has the freedom of his/her operating cash flows… or is doomed to solicit endlessly financial backers with a sword of Damocles constantly above his/her head.

To this extent, let’s consider the financial room for manoeuvre in times of crisis and which key items should be scrutinized even more than during business-as-usual periods.

Operational and financial levers

Cost-cutting is not an end in itself, and the same applies to new loans or new equity. Your main financial backers should not be your investors or your bankers: it should be your customers. Many successful companies grow without any other resources than the money paid by their customers and this philosophy gave birth to numerous worldwide leaders. Private equity is of course a tremendous tool to develop ambitious startups, but this benefits only a minority of SMEs, with intrinsically scalable winner-takes-all business models. These happy few get venture capital and growth funding if they are able to become something else than an energy-burning machine.


Your main financial backers should not be your investors or your bankers: it should be your customers.


Let’s therefore list the main levers available by focusing on operations. Again, the following list summarizes the best practices in terms of cash management at large.

Operations: the ultimate path to free cash flows

  • Margin and/or turnover improvement: in times of crisis, the relevance of your value proposition and the quality of your marketing and sales plan are more important than ever. If you can really measure the value provided by your offer in the eyes of your customer and if this value is huge (e.g. a must-have product or service), your pricing power will be high. Otherwise, you may discover the nice-to-have syndrome and even the best marketing and sales team will have difficulties to convince potential customers or retain existing ones. 
  • Increased sales per customer: before trying to reach new customers, it is often more profitable to sell additional services to existing customers, since there is no additional acquisition cost, compared to new customers. For instance, a company developing Identity Life Cycle Management solutions for key accounts may complete its current Software as a Service business model with more professional services than usually, even if such services are more people-dependent and less scalable than software.
  • Optimizing your working capital requirements: it is more than ever necessary to reduce two major components of your working capital requirements: your inventory and your receivables. A huge crisis should lead you to get rid of “toxic customers”, the ones who pay within more than 120 days. Unless you are yourself a bank, you do not have to be the bank of such clients. When these champions of delayed payment are big companies, the practice of “name and shame” should be generalized in order to disclose such behaviors that create a fatal chain effect in the economic system.
  • Deferral of social charges and other deadlines: if your company is soon short of cash, the deferral of social charges or other taxes is aa vital move. Such deferred payments alleviate your current cash burn but impose more than ever to generate additional free cash flows as soon as possible in order to pay these operating expenses.
  • Partial activity and holidays during off-peak periods: adjusting your company’s payroll expenses to an economic downturn is a good way to avoid layoffs. During the covid-19 crisis, most states generalized the access to partial unemployment. In the same vein, encouraging employees to take more holidays during off-peak periods is also a good way to optimize a company’s ability to serve customers when required and to reduce the sails when there is almost no business.

Financial sources: in addition to all the rest…

  • Accelerated recovery of public aid and tax credits: deep tech startups and innovative companies at large are often subsidized by various public financial schemes, including refundable tax credits. In times of crisis, the collection of such receivables becomes a priority.
  • Partners’ deferral of remuneration: when cash is scarce, it is counterproductive and even shocking to pay dividends, if any. In the same vein, if the company’s associates can afford it, they often deposit their bonuses on the company’s current account.


When cash is scarce, it is counterproductive and even shocking to pay dividends, if any. 


  • New equity or convertible bonds: if required, you can also try to issue new shares and/or bonds, but this is obviously the most expensive source of funding, especially when the party is over in terms of cutthroat competition between venture capital or growth funds to finance startups.
  • State guaranteed bank loans: such loans are provided by most states in order to prevent as many bankruptcies as possible. Even if your company does not really need this money in the short term, our advice would be to take such loans to secure cash in order to prevent future liquidity crises… provided you will generate significant future free cash flows to pay back such loans.

Value creation and the virtues of forecasting

Your ultimate room for manoeuvre lies in the value created for your customers, reason why the best financiers do not only analyze balance sheets or profit and loss accounts. Without a robust marketing plan, business planning often rhymes with daydreaming. This is the reason why a paper about cash management in times of crisis focuses in priority on operating free cash flows. 

Dwight Eisenhower’s aphorism, "Plans are nothing, planning is everything" perfectly summarizes the importance and the limits of the planning process. Forecasting is a collective action creating a shared vision and a common will to execute such plans.

Business will never be a long quiet river but a minimum of financial prudence should help you overcome most difficulties. So, enjoy your journey in the new post-covid world!


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