Now that the grim reality of the Coronavirus Pandemic has sunk in and you have taken some initial steps to deal with it, you are likely wondering what other steps you can take to guard against the failure of your business.
Perhaps you have applied for, and possibly even received, a short-term loan under the government’s SBA Paycheck Protection Program. If so, be prepared to supply evidence how as to those funds were applied. Remember that the purpose of the loan was to keep most of your employees on the payroll through May and June. If you cannot do this, the loan will likely not be forgivable.
Hopefully, you have taken the following steps already:
- Make technology arrangements to allow employees to work from home.
- Cut non-essential expenses.
- Businesses who anticipate a slowing of demand for their product(s) should consider reducing inventories and slowing down their supply chain.
- Other companies who anticipate continued or increased demand for their product need to ensure the integrity of their supply chain, find alternate suppliers, and ensure adequate inventory.
- Just as we, as individuals, have been advised by the CDC to have two to three weeks of essential supplies in our homes, companies must begin to increase cash on hand to help get through the tribulations of the next few months.
- Convert non-earning and non-essential assets into cash.
- Most importantly, future cash inflows need to be accurately projected out to 13-weeks, and cash outflows managed, to stay within that envelope.
You may be wondering what else you can do to help your business ride out this societal nightmare. As the saying goes: “Hope for the best but prepare for the worst.”
By the time businesses are able to reopen, the cash they rely upon to run their business from the collection of accounts receivable will likely have been collected, leaving no cash flow to cover daily operating expenses. During the shut-down, businesses may have been tempted to use their precious cash to settle trade payables and cover basic fixed expenses leaving little cash on hand.
The situation feels dire and for most businesses it will be a long term “grind-out.” However, there are additional steps you can take to “prepare for the worst”:
- If you do not already have one available, arrange for a line of credit to provide additional liquidity. You will likely need it.
- Be prepared to draw down on working capital lines of credit for liquidity before they are frozen by your lender.
- Slow payments to vendors/suppliers to create working capital.
- Negotiate discounts with creditors.
- Consider converting some trade debt to long-term notes to relieve the burden on working capital.
- Contact lenders and fixed payment vendors to defer your payments for up to three months.
- Rebid all fixed price contracts. Aggressively sharpen your pencil here.
- Customer demand may be weak. Use aggressive/innovative techniques to engage customers. Make them part of the solution. Think out of the box.
- Anticipate new changes in customer demand and position your products and/or services accordingly.
- Create a confidential cash “war chest” in case you eventually need to file for protection in bankruptcy.
- Once you have all your ducks in a row, sit down with your lenders and work out a long-term strategy. They will want to confirm that you have taken all the aforementioned steps to restructure your business. Present them with a formal plan and projections.
Consider seeking the services of an outside professional management consultant to help with your plan and negotiations with your lenders. Certified Turnaround Professionals can be quite helpful in quickly preparing borrowers to weather the storm and should be considered as one of the best tools available to lenders and business owners.
Burke Advisory Services
April 27, 2020
Kevin Burke is a member of the Turnaround Management Association and a Certified Turnaround Professional. A graduate of the Villanova School of Business, he has over 35 years of experience in banking and executive management. His management consulting practice is located in Troy, Michigan.