With so much uncertainty in the economy during this unprecedented health crisis, planning and communication are critical to any company’s survival. Much is being said about preserving cash. And it’s because we all know cash will continue to be king even when businesses restart operations.
#1. Managing Cash
Cash is the first priority. Preparing a rolling 13-week cash flow projection will help manage cash. This is true for those companies that are considered essential businesses, and especially those that may be shut down or operating at reduced levels. When preparing an effective cash flow projection, management needs to communicate with its customers, suppliers, lenders, landlord, and other creditors to understand the timing of the cash inflow and outflow required to maintain operations. While management cannot control what customers or suppliers do, there needs to be a plan for any disruption that can impact operations.
When businesses do restart, a large cash investment will be needed. Suppliers will need to be paid. Payroll must be made. Mortgages and/or landlords will expect payment. Banks that deferred payments during the pandemic will require principal payments to begin. Inventory levels will need to be built back up to meet suppressed demand. New safety measures must be implemented and paid for.
But this will also be at a time when business assets are at low levels. Receivables are paid down because businesses haven’t been generating any sales. Inventory is at low levels or at an improper balance to complete new orders. Companies may be out-of-formula with their lender and need to negotiate new terms to meet daily working capital needs. Turning to a third-party consultant may help in negotiating with the creditors and implementing a plan to preserve cash.
Prior to the current health crisis, finding qualified, experienced employees was difficult even when times were good. Management must be in constant contact with all employees to keep them informed on the timing of their return to work. Proper planning and implementation must take place to ensure safety and it must be a priority. Thoroughly and repeatedly explain the changes made to maintain safety. Retaining experienced staff is critical at this time. Finding replacement staff is a time-consuming effort and could result in lost new business. If needed, staffing agencies can be a source of labor to temporarily fill the gaps.
Contacting existing customers to discuss their issues, delivery requirements when POs are released, and production constraints or supply chain issues is imperative. It’s also the time to discuss the payment status on outstanding invoices to determine the timing of cash receipts. This will dictate the staffing, supply needs and cash required to meet delivery schedules or service contracts. It could also be an opportunity to discuss new business as other companies also begin to ramp up operations.
Ultimately, it’s about building and maintaining relationships. Most companies are in a similar situation. Be flexible and understanding to address customer needs.
#4. Supplier Issues
Management must stay connected with its suppliers to ensure they can supply the products and/or services when needed prior to work being released. There should be a plan for an alternative source(s) if the supply chain is disrupted. Not having the right mix of products in inventory or being able to service the customer’s needs will result in lost opportunities to generate sales and create working capital availability.
Staying in regular contact with lenders is vitally important to ensure that financing is available when cash is needed. If additional funding is required, be prepared to provide additional documentation and support. It may require a loan modification due to financial and collateral covenant defaults. Lenders do not like to be surprised, especially with bad news. If bank financing isn’t an option, seek other sources to finance cash needs going forward. Family and friends may be an option, as well as asset-based and factoring lenders that can bridge working capital financing when the bank says no. If management hasn’t already done so, federal and state programs are available to provide grants (i.e. PPP financing) or loans at low interest rates.
#6. Communication is Key
Planning and communications with all employees, creditors, customers and their lender will be critical going forward. It cannot be stressed enough – ongoing dialogue is key with all involved parties. Management must have internal reporting available and be flexible to make timely decisions. Being proactive and not reactive will be the major factor determining which companies survive and grow and those that must file for bankruptcy protection or possibly close their doors permanently.