As cities and states across the country have responded to COVID-19, businesses have had to adapt rapidly. No one knows how long it will take to return to normal, or what the new normal will look like. Even companies that return to normal operations soon will face lasting economic fallout. Nevertheless, regardless of the uncertainties ahead, there are measures financial executives can take to manage the consequences and help their businesses remain healthy:
1. Keep Communicating
While your instincts may tell you to work tirelessly on financial scenarios and contingency plans, remember that people long for clear and decisive leadership during times of uncertainty. The best way to combat fear is to remain highly visible and communicate. Talk to your staff; talk to your customers; and talk to your key vendors, suppliers and service providers. Learn what their concerns are. Learn how their needs have changed. Help them feel valued and confident that you are working with them to get through this together. Consistent, positive communications will foster confidence and keep the business moving forward.
2. Maintain Cash Flow
During any crisis, prudent cash flow management is critical. Cash is still king when it comes to continuity, and that means staying focused on creating liquidity. You must understand vital sources of cash, as you have less control on money coming in than what goes out. What tools do you have available? For example, consider prompt-pay discounts or offering payment plans to customers or partner channels facing significant hardships. The driving principle is to maintain collections, even if that means making some concessions.
To control outflows, prioritize significant expenditures into areas where you can preserve cash:
- Identify discretionary expenditures that can be temporarily suspended or eliminated.
- Keep an open dialogue with your vendors, suppliers and service providers. Show your desire to keep the commitments you have made to each other. If you ask for payment concessions, consider offering a contract extension.
- Seek out opportunities to finance certain capital obligations, especially during this period of historically low interest rates.
- Review employee incentives and bonus plans for possible revision, given the dramatic change in the current business environment. Proactively create a termination/severance payment policy.
3. Use Cash Flow Forecasting Models
In times of business uncertainty, one of the most useful tools for any financial executive is a weekly cash flow model. In developing cash projection models, build in at least 18 to 24 months of history, especially for businesses that experience seasonality. Incorporate as much complementary data into your collections dashboard as possible to help identify trend lines and behaviors. For example, overlay revenue production with timing of billing and collections to get a true sense of the cash conversion cycle. If you can monitor revenue daily, that information will help you create well-thought-out projections.
Segment your uses of capital into monthly expenditures (payroll, benefits, rent and key suppliers), quarterly or annual disbursements (bonuses, retirement plan matches, insurance renewals, SaaS providers, taxes, and principal and interest payments), and nonrecurring expenses (transactions and settlements). This segmentation allows you to have a tight grasp on your cash outflows and timing of expenditures.
Create various stress-testing scenarios to estimate how long it will be until you encounter liquidity problems. Understand what vital performance indicators you can track daily or weekly to offer insights into unfavorable trend lines. It is important to use as much underpinning data as available to feed into your model, because the best data will provide the clearest view possible. Accurate forecasting will show when you must enact course corrections to maintain sufficient liquidity and keep your business from violating credit limits or covenants.
4. Control Credit Risks
Depending on your clientele, you may need to pay closer attention than ever to your credit scoring policies for new customers. Do you need to change traditional payment terms regarding advances, cash on delivery, or late payment penalties/interest for higher-risk new customers? Be careful to protect your business against providing goods or services without payment. Be creative in your payment terms to obtain the necessary assurances that you will be paid on time.
5. Manage Debt
During times of turmoil, prioritize the management of your debt obligations. For example, developing predicative asset-based lending models to understand the availability of debt under various scenarios. These tools allow you to understand your borrowing base and the availability of cash. Be sure to communicate with your lenders; you may be able to negotiate lease interest rates and payment terms on outstanding credit facilities.
6. Evaluate Employee Compensation Policies
Turbulent times often require difficult decisions, which includes employee compensation. Payroll generally represents one of the largest, if not the largest, cash outlays for a business. Review incentive and bonus plans for possible revisions that respond to changes in the current business environment. Although decisions to terminate employees can be very difficult and stressful, it is also important to proactively create a termination and severance payment policy, in case such steps become necessary.
7. Maintain Strong Controls
When conditions are changing rapidly, take extra care to ensure your control environment has not been compromised. With COVID-19 shelter-in-place orders, many businesses shifted quickly to a remote workforce, which may have altered routine business processes. Review your key processes — such as depositing collections and remitting payments — and confirm that proper segregation of duties and compensating controls are still in place. Maintaining sufficient controls is critical to safeguard assets and mitigate fraud risk, especially when so much is still in flux.
8. Preserve Enterprise Value
The underlying purpose of all these steps is ultimately to preserve your company’s overall value, including its cash flows. As you respond to changing conditions, remember to protect and secure critical assets, such as intellectual property. All considerations and decisions made during any time of crisis should be focused on long-term objectives. You may need to take short-term measures to meet immediate needs, but never lose sight of their long-term impact and ultimate effect on your company’s health and longevity.
Whatever changes are in store, using these principles to maintain liquidity will put your business in the best possible position to emerge from the current situation strong and successful. If you have questions or need advice with this or other business issues related to the impacts of the COVID-19 crisis, please contact us. We are here to help.
Authored by Jordan T. Phelps, CPA.
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