A Business Owner's Guide to Managing and Maximizing Cash Flow in Challenging Times

SUBMITTED BY THE BUSINESS EXIT AND TRANSITION SERVICES TEAM - 04/08/20

According to the US Chamber of Commerce and MetLife Special Report dated April 3, 2020, approximately one in four (24%) small businesses report having already temporarily shut down. For those that are still operating, 40% are reporting that they may be shutting down temporarily in the next two weeks, and 43% say that without assistance, a permanent shutdown may be necessary in less than six months.

Clearly this is a very difficult time for many business owners, and there are many decisions that need to be made both now and in the coming months. As the Brightworth Business Exit & Transitions Services (BETS) team works to advise business owners in today’s environment, we address the more immediate issues within the framework of the fundamental value drivers that make businesses successful over the long term.

At Brightworth – we use the I.M.G.O.O.D.™ checklist –which outlines these key value drivers as follows:

I – Increase and manage cash flow
M – Institutionalized Management Team and Employees
G – Documented Growth Strategy
O – Optimized Financial Statements
O – Operations and Process Documentation
D – Diversified Customer Base

This week, we will focus on the “I” in the list and address key issues with cash flow.  With people across the country staying at home during the COVID-19 health crisis, cash flow management is becoming a critical issue for many small businesses.

The first step for business owners is to determine what can be done to preserve cash by delaying capital spending and reducing expenses. Some examples include:

  • If the business leases space for operations, talk to landlords and discuss potential renegotiation of contract terms. In some cases, business owners have been able to negotiate a short-term suspension of payments over a 30, 60 or 90 day time period.
  • If the business has existing loans in place, reach out to the banker and ask about ways to modify payment plans on loans. There are banks that put business loans on forbearance which helps to preserve cash for the business in the short term. Many banks are working to help their business owner clients as much as possible to avoid a default on their loans.
  • Also negotiate with the banker to determine if a line of credit can be increased to allow for access to more capital and/or whether or not you can extend the term of the line of credit, which is typically 1 year.
  • If applicable, talk to vendors and ask about modifying payment terms to increase the time over which payments are made.
  • If applicable, talk with your Human Resources team to determine how to best manage idle employees.  Where appropriate, consider furloughing to enable idle employees to file for improved Unemployment Benefits under the CARES Act.  This should be carefully considered in the context of the Payroll Protection Program mentioned below.

The next step is for the business owner or CFO to do cash flow forecast modeling so that there is a clear picture of what happens to cash flow and working capital if revenues are down each month. We recommend running various economic scenarios and then documenting what action steps will be taken for each outcome. In many cases, access to additional working capital will be needed to bridge the financial gap until the social distancing restrictions are lifted and the economy begins to rebound. The following are areas that may be explored:

  • Paycheck Protection Program (PPP) – The recent stimulus bill called the CARES Act created the PPP which allows for potentially forgivable loans of the lessor of 2.5x monthly payroll or $10M to small business owners and non-profits with less than 500 employees.

!! Business owners who qualify should move quickly to apply for this program as thousands of business owners have already started the process. With a “first come first serve” process, it is likely that the $350B that is allocated to this program will be accounted for soon, and it is not known whether additional stimulus funds will be released for this program.

!! It is also important to note that while the underwriting criteria for these loans are less stringent, banks still have some level of liability in offering these loans and must protect against fraud and/or laundering. As a result of these and the volume of need, banks are individually determining who they will assist with these loans (i.e. only existing clients) and how large of a loan portfolio under this program they want to hold.

Please click here for more information on this program.

  • U.S. Small Business Administration Economic Injury Disaster Loans (EIDL) – This program provides repayable loans of up to $2MM to small businesses and non-profits who have suffered substantial economic injury. Governor Kemp recently deemed Georgia a disaster zone due to the COVID-19 crisis which makes these loans available to business owners in Georgia.

Please click here for more information on this program.

  • Line of credit – Many business owners have a line of credit open to help them manage working capital during different cycles of their business. If a line of credit is in place, it may make sense to take a draw and keep the cash on hand as many lines of credit were closed during the 2008 economic downturn. It is likely a difficult time to get a line of credit put in place in this environment, unless there is sufficient collateral either inside or outside of the business.
  • Invest Atlanta Business Continuity Loan Fund (BCLF) – The City of Atlanta funded the BCLF with $1.5M to offer small businesses in Atlanta a 0% loan to address “a lack of working capital and cash flows as a result of reduced consumer demand, the ability to fulfill product or service orders, and other economic conditions.”
  • Special Program – Facebook – Facebook launched their Small Business Grant Program which offers $100MM in grants and ad credits to small business owners in the 30 countries where they operate. $40MM is being offered in select areas in the United States, and according to their website, grants are being offered to small businesses in Fulton County.
  • Private Lenders – If a business owner is unable to find access to capital from the above-mentioned programs, there are private lenders who may be willing to offer short-term loans. These types of loans would typically involve a higher interest rate but may bridge the gap to allow a business to continue to operate until the economy recovers.

It is also recommended that business owners take the time to document the hard and soft costs to the business resulting from the pandemic. Having this information available will help the business quantify defensible expenses to provide cushion to covenant ratios with the bank and can provide future buyers with an explanation on changes to revenue in the financials during this time period.

The Brightworth Business Exit & Transition Services Team (BETS) are standing by to assist you with navigating through the COVID-19 health crisis, achieving your exit objectives, and maintaining your exit and transition timeline.
 

This information was derived from sources believed to be factual and reliable. It is being provided for informational purposes only and should not be construed as tax or legal advice. Please consult a tax or financial advisor with questions about your specific situation.

 

Have more questions about managing and maximizing cashflow in challenging times? Click here