Whether it's the coronavirus or another crisis, all business owners need to plan for a list of “unknowns” to keep their company going (if possible), so that no matter what, you come out the other end with a business still capable of moving forward. The problem is that we are dealing with issues none of us have ever had to deal with before, and with solutions never before considered - though the financial issues come second when it comes to the safety of your personnel!
Over the prior two or three months, we discussed a game plan for 2020, which covered both internal and external factors that could impact operating results and cash flow. Unfortunately, out of the five choices we put on the table for 2020, the “could be bad” option is where we are headed.
Another column also covered break-even analysis with suggestions for how to manage and avoid fix costs in order to lower your break-even sales number. Unfortunately, this topic will also take on a whole new level of importance going forward.
Other topics regarding cash flow and cash position as a starting point for the next six months will also be of high importance. There is no doubt that cash balances available and additional required liquidity will make you or break you if you are not able to readjust your financial obligations.
Get Your Game Plan Together
If this fight is short term, say 60 to 90 days, most of you can figure out how to manage expenses and cash flow to survive. If longer - 180 days or more - some will fall by the wayside. Add in the extended impact where the economy slows down into recession or depression and your ability to restore lost profits will get pushed out like it was post-2009.
For now, let’s assume a six-month time frame where our economy and industry are in a state of flux. How are we going to address the unknowns we will face during this time period?
First, get your management team together to develop a “to do” list. This will include your attorney, accountant, CFO and other management members.
Second, management should contact those project owners they are working for to get a status on the jobs and their ability to pay outstanding invoices. This information should be conveyed to the management members.
The major issue is cash flow and cash availability:
- Get someone working on a cash forecast.
- Take into consideration work-in-progress, billings to be prepared and forwarded to customers, poor-paying customers and any other issues the group can come up with.
- Also decide which accounts payables are mandatory payments and stretch them out where you can. Other vendor payables may require a conversation asking to extend the payment date.
Part of this process is also asking banks and finance companies to allow for either interest-only or zero payments for at least three to four months. Use credit cards when you can to spread the payments over a longer term. The cash forecast, using assumptions laid out during the management meeting, should be done within 48 hours. If you do not have the expertise in-house to get this report completed, lay it on your accountant but with the same completion time required.
If the cash forecast says you can make it through four to six months, reassess it daily and adjust as necessary as new information about customers, jobsites and materials come to light.
If the Forecast Looks Bleak
Should the cash forecast reflect a material shortfall, more planning is required to stop the bleeding with the goal to make it out of this six-month financial crisis and move ahead to recover what you have lost. Hopefully, Washington will come up with a plan to provide liquidity to the level where you can avoid the really hard decisions. If not, this is where it gets tough because you are going to have to make hard decision about employees, vendor contracts and other expenses.
In terms of payroll, you can consider a downward adjustment for a set amount of time, or you can lay off people for a set time frame. If there is the possibility that jobsites may get shut down or projects postponed or cancelled, you may have to lay off personnel. One more option is a straight payroll reduction for all employees that allows for you to keep the talented workers on the payroll. A similar review should be made for job costs, overhead and operating expenses.
Another step is to review your open contracts in terms of your responsibility for delays caused by material shortages and project cost overruns. Every contract you signed has this language in it. You may find you need to finish Job #1 no matter what since you are responsible for these costs.
Other issues to consider include interest rates, deflation, insurance, personnel policies and underutilized equipment.
- Ask for an interest rate reduction.
- Deflation is real. Make sure you are not overpaying for materials ordered three months ago.
- Sell off underutilized equipment to generate cash.
- Make sure you comply with all federal and state employment issues.
- Consider buying locally sourced materials and supplies. Part of our problem results from goods being made and shipped from overseas, which in many cases can be avoided if they are made in the USA.
Finally, consider what this episode is going to do to change behaviors in the future. For example, I can see working from home changing our business environment because it’s easier to do than people think. I have a good tech who set up every employee on the system to work remotely. All computers get uploaded to the cloud daily so anyone who needs it has full access to their files. If you can track the work being done you can control the process. You might give it a shot for those positions where it makes sense.
I hope and pray you all get through the health and financial crises without any major negative setbacks. But the adjustments noted above will be part of that process.