Effectively Managing Business Cash Flow Through Crisis

This post comes from our friends (John Coffin & Emmett Moore) at Practical Growth Advisors.

More than ever, we are in a time where you need clear advice and actionable solutions.

The COVID-19 pandemic blindsided the world and especially Americans when it hit the United States hard. With the rapid multiplication of cases, our government ordered people to stay home and businesses to close. Nearly all individuals and companies continue to experience the weight of this crisis.

In crises, we feel a threat to the success of the businesses we have worked extremely hard to build for serving others. With workplaces closed, new working environments, and significantly reduced cash flow, uncertainty can develop, and sometimes pressure mounts to the point of some throwing up their hands, expressing, “I’m done.”

If that is you, the Trusted CFO Solutions Task Force is here to help. You need clear advice and actionable solutions so your business can emerge stronger from this crisis.

Did you know that the Chinese word for “crisis” (危机) is composed of two Chinese characters? The two characters signify “danger” and “opportunity,” respectively. It is true. Times of perceived danger can present new opportunities.

As you continue working while waiting for your Payroll Protection Plan (PPP) loan approval, we want to share a few ideas that may help you gain an advantage in the tumult.

PPP Accounting and Audit Considerations

  1. Open a new bank account (or repurpose one you aren’t using) to deposit all PPP loan proceeds. This prevents commingling funds.
  2. Set up a new balance sheet account to keep track of the PPP loan.
  3. Track all the inflows and outflows to/from the account and reconcile monthly. Create a clean audit trail to support debt forgiveness following the 8-week period post loan closing.
  4. Maximize payroll paid during the 8 week calculation period to maximize the amount of cash you get to your people and PPP loan forgiveness.  The rules around the payroll calculation will be further defined in the coming weeks, but consider the following ideas to inject as much payroll into the calculation period as possible.
    1. If you have implemented salary reductions across the board to preserve cash, consider making up a portion or all of these reductions with PPP funds.
    2. Time payroll so that it hits the day after PPP funds come in and then make an additional payment on the last day of the 8-week period.
    3. Consider paying one-time bonuses to your team with PPP proceeds to highlight exceptional service or teamwork.

EBITDA Reporting Considerations

Most bank reporting focuses on trailing four-quarter/twelve-month profitability so the effects of the current environment will impact your covenant compliance for the next 12-18 months.  Adjusted profitability for the fiscal year 2020 will also be critical if you are considering selling your business or attracting outside capital in the coming years. 

Consider the following actions to maximize EBITDA for covenant compliance and investor/bank discussions.

  • Set up at least 3 new income statement accounts to keep track of one-time, Coronavirus-related expenses. Capture hard, indisputable costs in one, support costs in the second, and soft costs in the third:
    • ACCT1 COVID-19 Direct Costs: – accumulate hard-dollar, direct costs related to employee lay-offs, safety costs, re-forecasting, and scenario analysis costs, cost of refinancing, etc.
    • ACCT2 COVID-19 Support Costs: – Capture discrete costs to support modifying your company’s operating approach through the crisis (e.g. production/delivery process automation, refurbishing during downtime, discounts to collect AR, expedite fees on inventory, bad debt, etc.)
    • ACCT3 COVID-19 Indirect Costs:– accumulate soft costs that represent time and energy spent on the Corona crisis (e.g. allocate time of people, including the CEO’s time, rent when don’t need facilities, support staff kept when not needed, time spent on PPP, etc.)
  • Go back into February and March and make journal entries to reclass expenses into these three new accounts. Capture these costs now while they are fresh in your mind.

If you are a Sage Intacct User, view the step-by-step outline for adding a new project dimension.

Great Ideas from Great Companies

Below are some great ideas that other CEOs have implemented to help them emerge stronger.

  • Automate non-value-add activities during down-time. After furloughing 250 people, a CEO in the hospitality industry is building scheduling software to enable them to hire back 90 people in September and convert the remaining 160 jobs to 1099 status.
  • Refinance or negotiate revised terms on current debt (e.g. shift to interest-only payments for 3 months, restructure covenant levels for 2020, renegotiate advance rates, concentrations and definition of collateral (include A/R > 120 v > 90 days…) etc. 
  • Provide employees with an “essential business” letter in case they are stopped by the police and so that they can put it on their dashboard when parking their car.
  • Complete multiple forecast scenarios to plan for Corona impact over the next 3-6 months and delink forecasting from the annual budget cycle with monthly/quarterly updates as events merit.
  • Model the impact of deals shifting out on the balance sheet/cash – most deals aren’t going away but are shifting out an unspecified number of months. Drill down on the “close to cash” cycle on all products and distribution channels to preserve cash and maximize flexibility.
  • Hire great people while they are available and target exceptional candidates when competitors aren’t treating their people fairly.
  • Accelerate outsourced cleaning services to maintain a pristine work environment (Cintas, Stanley Steamer, etc.).
  • Use cash to develop a competitive advantage in your supply chain.  Buy inventory at discounts, negotiate better terms with vendors, work with customers to provide better terms in exchange for continuing to buy.

In this article, we share some advice of offensive actions you can put into play in the coming weeks and a few steps of other great companies. Remembering that the Chinese meaning of the word crisis connects danger and opportunity, let us help you make this disruption to your business be an opportunity to emerge stronger.

The TCFOS Task Force’s mission is to help your business emerge stronger!

To learn more about Practical Growth Advisors, click here to visit their website.

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