Five things business owners can do to prepare for a cash crunch
We are living through truly unprecedented times. The speed at which COVID-19 has spread through global communities and shut down businesses seemingly overnight is remarkable. All of us have had to quickly shift to a crisis management mindset. Two weeks ago, the Travel, Hospitality and Healthcare industries took major hits as services were impacted and sales pipelines dried up overnight. Last week, mandatory Shelter in Place ordinances started shutting down businesses deemed as non-essential. Unfortunately, this is rippling throughout the economy and will affect almost every single industry.
At Compass East, we’re proactively working with clients to build crisis response plans to help manage cash through an uncertain period of time. The following is our Crisis Management Checklist to help you weather the storm:
Fixed Costs Assessment
First, you’ll need to quickly understand your fixed costs. What is your current overhead? Rent, salaries, utilities? What are your interest expense payments? Getting a firm understanding of fixed costs will help you understand the number required to continue to operate the business. Determine what this number is and work from there.
Deferrals and Negotiations
While “fixed” costs are typically less flexible, given the situation there could be flexibility on your debt payments. Talk to your lenders and your landlord. Based on our conversations, debtholders are expecting it. Banks are typically open to a 90-day delay of payments that will simply be tacked on at the end of the loan term (with an amortization schedule adjustment). Credit card companies are also allowing for reasonable lapses in payments. If this crisis begins to wane in a few months like we hope it does, they should be open to negotiation given this is a black swan event.
People Planning
Unfortunately, this is where things get hard because it involves your people. Make a list of your employees, whether they’re salaried or hourly, and identify potential opportunities to temporarily reduce hours or furlough employees. Who is essential to the continued operations of the business? How will you bring people back on board as the business ramps up out of the slowdown?
The goal is to focus on taking care of your employees as much as feasibly possible, without putting the survival of the business in jeopardy. Can you cover medical expenses while wages are reduced? Can you defer payroll for a month or two? Can you pull on a line of credit or apply for emergency funding to make payroll? The recently passed Families First Act provides for tax credits for small businesses on payroll taxes if employees are paid 80 hours of emergency sick leave caring for themselves or family members. Keep in mind that you may need to hire the team back in a short timeframe and restarting the hiring engine could be more costly than covering expenses for your people in the near-term.
Emergency Funding Options
Things are changing daily, but both the Federal Government and State Governments are likely to launch emergency relief programs aimed at supporting small businesses during the crisis. One program that is currently live is the SBA Disaster Loan Assistance Program. Businesses are now eligible for SBA Loans related to COVID-19 disruption of business. Small businesses can borrow up to $2 million at low-interest rates to fund payroll, pay fixed debts, accounts payable, and used as working capital. Compass East is updating our relief resources page daily as new programs become available. The Senate has reached a $2 Trillion agreement as of March 25th, we will summarize details in a separate post when details are finalized.
There are other ways to leverage assets for cash. Depending on your business, it’s likely inventory or materials have already been purchased for the next few months. If facing a complete shutdown, you could potentially secure short term financing using inventory as collateral. Get creative with offering gift cards or VIP programs. If you have a membership model and people are canceling, offer a long-term membership at a discounted rate to keep those customers on board. This is the time to get creative.
Cash Forecasting Scenario Planning
Once you have a handle on the first four items, you’ll need to incorporate all of this information to adjust your financial model. What does your model look like if things come back to normal in one, two and three months? Depending on your business and how it might be affected, you’ll need to model in significant downside scenarios. This could range from temporary delays in expected revenue as purchasing decisions are delayed to a complete shutdown of the business due to shelter in place ordinances. Get a handle on how much cash you have in the bank, access to lines of credit, how long you can survive with significantly delayed payments from current customers, and no additional new revenue based on the conversations happening with prospective clients in the pipeline. In order to make strategic decisions, you’ll need to understand the worst-case scenario and plan for it.
Unlike previous crises, the speed at which Coronavirus has shut down the global economy is unprecedented. We all first and foremost must adhere to CDC recommendations to socially isolate, wash hands, and work from home to ensure we quickly can get through this together. In the short-term, however, there is going to be real pain inflicted on small businesses. Start developing a crisis plan ASAP to manage your business through the next few months.
Compass East is actively guiding our clients on the rapidly evolving situation. Please reach out with any questions or opportunities to support your business.
John Lanahan
Director Of Financial Strategy
john.lanahan@compasseast.com