Assessments of cash flow, supply chains and labour issues are crucial
We have all heard the mantra about living in unprecedented times. But never has it been truer than today, as the impact of the COVID-19 pandemic continues to disrupt our world. For businesses large and small, concerns mount daily about their ability to, at best, continue operating in the normal course and, at worst, survive until this crisis ends.
At this time, no one can accurately predict the state of business in three to six months. The only solace for business owners today is to know that their worries and fears are shared by many, if not all, other business owners.
That said, there are several actions businesses should consider as they deal with the uncertain road ahead. Some of those are set out below:
Review the big picture
Each business has a unique set of circumstances. Those factors will shape the major considerations that affect its path forward.
Owners should consider what their business offers to customers that differentiates it in the marketplace. It may be that resources from other areas of the business can be redirected to support core products and services, if needed. In certain cases, consider temporarily suspending (or permanently terminating) certain unprofitable offerings.
Think about ways these resources may be adapted to what the marketplace currently requires. Some distilleries have responded to the hand sanitiser shortage by redirecting a portion of their alcohol production into making hand sanitiser. This is a great example of how businesses can adapt to the market while enhancing their brand’s reputation and providing a benefit to society.
It is also important for a business to examine its current supply chain and try to identify any issues that might arise. Suppliers may be unable to meet production demands. Shipments from international suppliers might be delayed or refused at the border. If owners anticipate any of these issues, emphasize finding alternative suppliers, likely local or national, to meet their short-term needs.
Develop a business plan
Once an owner understands the direction their business will follow during the next few months, setting out those intentions in writing is important for the owner and for those with whom they will be speaking.
The business plan should describe how the owner intends to operate during the next three months. The plan should set out any changes to operations that are being contemplated and that are reflected in the cash flow projection discussed below.
Prepare a cash flow projection
The cash flow projection should be the financial reflection of an owner’s business plan. Typically, preparers of financial projections see their business through an optimistic lens. But preparers today need to ensure that the projection reflects the current reality.
1. Identifying Sources of Cash Receipts
It’s critical to understand what funds the company can expect to receive in the near term. Recognizing that the business and its customers are facing similar uncertainties, engage in discussions with them to find out their payment intentions for amounts owed. The more important a business’ products and services are to them, the more likely they will pay their outstanding account on a timely basis.
Ensure that the business is set up with its bank to receive electronic payments, as mail delivery might become unreliable and bank branches may soon not be open.
2. Review all expenses
Now is the time to tighten the purse strings. Review expenses to determine those that are not essential at this time. Any non-essential expenses should be significantly reduced or eliminated for the time being. While this sounds good in theory, some expenses might be unnecessary now but essential in the longer term. Costs for items such as key employees, contracts, etc., may have to be incurred now because an owner will need to have those in place when things return to normal. It is a delicate balancing act.
In looking at business expenditures and the timing thereof, an owner should review their inventory management strategy and determine if there is a way to reduce costs. For example, certain businesses are able to adapt to a just-in-time (“JIT”) inventory or manufacturing system, in which inventory is not stockpiled but rather obtained from suppliers on an as-needed basis. Adopting a JIT approach, assuming a supplier can ensure delivery on time, may save significant costs related to purchase of materials, storage, etc.
3. The cash flow projection
Once an owner has reviewed their sources of revenue and required expenditures, they should incorporate that information into a cash flow projection. Due to the uncertainties and current unknowns, the cash flow projection should be prepared weekly for at least the next three months. When preparing the cash flow, make sure the projected receipts and disbursements are realistic and achievable. If the assumptions to the cash flow are not realistic, the projection will be of no use. Use conservative estimates rather than optimistic ones.
Once the projection is completed, it will become evident whether the company can ride out the storm on its own or whether additional funding will be required.
Communicate with lenders
Banks and other lenders are aware of the circumstances facing all of us. However, they are not aware of how the situation is affecting a specific business. Therefore, it is important for an owner to contact their bank or other lenders once they have planned how to proceed over the next few months.
In times like these, the need for an owner to communicate with their lenders cannot be overstated. It is better for an owner to initiate contact because that demonstrates the owner’s control of the business situation, rather than leaving lenders to guess or make incorrect assumptions about how the owner intends to pull through.
It appears that many banks and institutional lenders are establishing structured programs and forbearance arrangements to provide temporary relief to businesses.
However, the goodwill of the banks at this time should not be taken for granted. It is important for business owners not to undertake any transactions that would cause their lenders to question their sincerity or credibility. Notwithstanding present circumstances, banks will only accommodate customers they trust.
Communicate with other stakeholders
Businesses need to make an extra effort to communicate with all of their stakeholders, including customers, suppliers, employees, regulators and others. If owners anticipate a cash flow shortage, they should be proactive and let suppliers know that they might push out payments by 30 or 60 days. If there are delays in service timelines or bottlenecks in the supply chain that will impact delivery times, let customers know as soon as possible.
Everyone with whom an owner does business understands that the owner could be facing a financial crunch. Customers, landlords, trade suppliers and service providers may be willing to renegotiate terms, including payment deferrals, discounts for immediate payment, etc. It is likely in their best interest to see businesses survive the current storm, as it may be difficult for them to find new tenants, customers, suppliers, etc.
Check out available government assistance
The government have implemented measures to help soften the financial impact of the recent events for South Africans and South African businesses. Check the RSM COVID-19 Resource Centre for more information on this.
Review insurance coverage
Business owners should review their insurance policies and determine if they have coverage for business interruption or financial loss. If they do have that coverage, check to see that current developments do not represent an exclusion that will negate coverage. Lastly, make sure that premiums continue to be paid so that coverage does not lapse.
Don’t forget the employees
Employees are the lifeblood of every organisation. Like business owners, they too are worried. Owners should work with employees to ensure their needs are being met while ensuring the continuity of the business. If certain employees are unable to perform in their current role (for example, an international sales representative), see if there are other roles in the organisation with which they may be able to temporarily assist.
To help businesses be in position to retain employees, the government has introduced financial assistance measures. It is imperative that owners become familiar with these programs and take advantage of them. If the support programs are not adequate for a business’ needs, laying off some employees may be an undesirable result.
Make the best of a tough situation
In a recent interview with CNBC, celebrity entrepreneur Mark Cuban provided some sound advice — “Control what you can control.” Instead of an owner focusing on the negative impacts on their business, try to focus on the opportunities these circumstances provide. If possible, try to address any deficiencies or loose ends that have been neglected in the past. Review business and marketing plans and see where there may be room for improvement. Consider changes to the supply chain that may result in a more efficient and economical path going forward. And take a deep dive into the business as a whole.
Formal restructuring proceedings
In the event that a business cannot successfully negotiate its way through these turbulent times, there are a number of formal restructuring options. These options provide businesses with the opportunity to restructure their finances, including compromising amounts owed to their creditors while providing for a stay of proceedings that effectively prevents any creditor or stakeholder from commencing or continuing any action against the company.
Bryan A. Tennenbaum Daniel Weisz
Partner, RSM Canada Partner, RSM Canada