Creating the Path to Restore Value During COVID-19

Businesses in every industry have been severely impacted by the crises caused by COVID-19. This unexpected and unforeseen shock to the system has led to changes in business and operational models and has significantly affected cash flow and cash availability. In a business cash is king and liquidity is the key to successfully sustaining the business through a shock.

To maintain and create liquidity, business owners will be looking at their businesses in ways they have never done before. It is important to collaborate with your financial partners to ensure that available lines of credit remain available and explore new or additional financing options. The government provided stimulus to support liquidity to business owners as forgivable loans and other programs. These forgivable loans came with many restrictions, tax consequences, and complexity. This article will provide you with some ideas and guidance to help you improve cash flow, plan, and get through this crisis. Many of the ideas are just good business and should be implemented as part of your business anyway.

Cash-to-Cash Conversion Cycle

Usually companies focus on top-line revenue and profits and losses when managing the bottom line. Receivables and payables are often taken for granted. In a downturn, companies and their management teams must shift their focus from the income statement to the balance sheet. When managing cash-flow requirements, it is important to coordinate accounts payable, accounts receivable, and inventory simultaneously.

Monitor Accounts Receivable

When business is good and cash flow is strong, collecting accounts receivable is just part of everyday activities. With the crisis, this is not the case. Customers have delayed payments or may not be paying at all. Customers may be using credit cards, but you are finding more disputed charges than ever before. This cascades throughout the organization and leads to your suppliers not being paid in a timely fashion.

So, what to do:

- Set up billing and credit terms and stick to them.

- Rather than billing new customers the entire amount upon completion of services or

goods delivered have them make a deposit or partial payment in advance.

- Offer an early payment discount but realize that a 2% 10-day discount equates to 36% APR.

- Consider dynamic discounting. Look at the trend of when certain customers pay. Ask them if they want to pay earlier in exchange for a discount. Offer a discount for 5 days, 10 days, or 30 days depending on payment patterns and a discussion with your customer. The advantage is to enable cash to be received as needed, so you can plan accordingly. Design your own plan to meet your needs but think strategically about it and do not do this for all your customers. This policy is good for those slow-paying customers.

- Improve the collection process. Focus on customer-specific collection practices and identify those customers that may be changing their practices and insist on quicker payments.

- Send invoices more frequently. For services, send invoices as work progresses or on an agreed-upon schedule.

- Reach agreement with past due accounts to make partial payments. Every penny counts. Consider using credit cards or, preferably, electronic payments.

Accounts Payable Management

Some companies will unilaterally decide to delay payment to suppliers. This action damages relationships with suppliers and deprives them of the cash needed to operate their business. The result – late deliveries, perhaps reduced quality of products, and strained relationships. A better solution: talk with your suppliers and reach a payment agreement both parties can live with. If you discover your critical supplier is on the brink of failing, then consider lending them money or acquiring them.

Ask for discounts with your vendors. Sort vendors and find out how much you spend with them. The bigger ones should give you lower prices to retain your business. If you are under supply contracts, consider renegotiating for a longer contract in exchange for better pricing and terms. Remember you are trying to get through the crisis.

Scenario Planning

When the 2008 recession hit, those companies with good business and cash flow plans survived and, in some cases, thrived. Well thought-out scenario planning can guide you through difficult times and help you identify the best way to react as things fall. You will understand the amount of your burn rate and what your runway is before additional capital is required.

As the scenario is being built consider how the overall operating and business model is being impacted. Expect to make shifts in your business model for changes in the environment in which you do business. The cash needed must consider these shifts, whether they are positive or negative, and bake them into the scenario planning so that you get a feel for the amount of liquidity required. Any scenario planning must be accompanied by a strict bias for action and decisions should be driven by data.

Your income statement represents an aggregation of the profit and loss from customers, jobs, products, employees, events, marketing events, and other activities. Review each activity and prepare a profit and loss of each activity. Adjust your business plan to focus on those activities which generate the most profit and let go of those that do not meet a threshold. Let go of customers that do not produce a profit, identify areas of waste, and adjust your pricing structure. If it sounds difficult, it is, but you will conserve cash and make more money this way.

This is a good time to look at your processes, operations, and expenses. This will tell you where you can improve your processes to get rid of those things slowing you down. We are not talking about time studies, but rather how many times you are touching the same piece of paper or doing the same thing more than once for the same reason. Map your processes and it will become evident.

Start with a baseline, then go through all the key drivers for cash receipts and disbursements. Bring in the operations team to understand how they are thinking about the uncertainty and what their strategy is going to be. It is critical that all departments close to the action be involved and work together. Having a good streamlined governance structure and all information in one place will enable effective decision making.

Decisions and actions taken now will affect your options later. So, you must be aware and plan conservatively how to preserve cash. Working in 90-day increments will produce the most accurate results. The rolling 13-week cash flow is a tried and true methodology because it is unlikely that you will know, with certainty, what will happen after that time.

Action items to consider in your scenario planning:

- Reducing variable expenses has a greater effect on cash flow than focusing on fixed expenses. Examples:

- Imposing travel bans and non-essential meeting restrictions

- Hiring freezes

- Restrictions on discretionary spending – such as entertainment training

- Focus on your entire ecosystem and supply chain not just on your own operations.

- Who else is involved in your success and risk?

- Speak with your customers and suppliers and ask the tough questions about their issues and financial condition. They are going through some of the same issues and experiences you are. Decisions you make affect customers and suppliers. Be prepared to take some bold moves.

- Converting fixed to variable costs will maintain flexibility without any quick hits to your finances.

- Sell fixed assets such as real estate or capital equipment and then lease them back to raise cash.

- Consider selling equipment and use contract manufacturing.

- If you have trucks and transportation equipment, consider leasing and not owning.

- Use third-party warehousing.

- Review all discretionary spending from employee perks to marketing

- Review payroll – the presumption is that this is your largest expense. What changes need to be made to keep you afloat? Do not lay people off unless absolutely necessary. Options may be:

- Reduce contract labor and re-distribute work to full-time, permanent employees.

- Encourage employees to take vacation with or without pay. This is a benefit to the balance sheet as it reduces the vacation pay liability. It also conserves cash if the vacation is without pay.

- Freeze hiring.

- Consider layoffs – but only if necessary.

- Cut all salaries by, say, 20%.

- Cut leadership salaries.

This is the third in a sequence of articles that will provide you with actionable information that you can implement to create a sustainable business enterprise that has a culture of value acceleration. Stay tuned!

By Barry Goodman, CPA CEPA CMAA CVGA

Managing Director, Birkdale Transition Partners, LLC

Copyright: Cannot be Reused without Author’s Permission.

Birkdale Transition Partners LLC is the objective source for those seeking business sustainability, growth, or considering a business transition. Our goal is to ensure business sustainability and to maximize the value of an enterprise before any transition or transaction. Business owners without a transition plan often are unable to sell or transfer their company at its highest value. We help them to balance a company’s transition with the owner’s personal goals. Then we work with them to avoid problems caused by the lack of planning or not to recognize what needs to be added, corrected, or modified before.

Birkdale is unique because it only offers an unbiased assessment and solutions for the company owner. We do not sell any other products or services, so are a fee-only firm. We work in partnership with the company’s current professional advisors and staff. Because we help companies increase their monetary value, owners view our assistance as an investment—with payback and payout occurring during and after an engagement.

For a no-obligation, confidential discussion of your situation, please contact Barry Goodman at 312-626-1820 or barry@birkdalestransition.com

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Restore and Improve Cash Flow

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