Hopefully, the coronavirus pandemic curve is reversing in your region. But there is a possibility that it isn’t. With that in mind, I suggest planning for a six-month window of pandemic-related restrictions. This requires business owners to confront a list of never experienced “unknowns” and still find ways to come out the other end of the economic chaos with an operating company capable of moving forward to restore lost business and profits.
Six months is a long time, and given the time frame we are dealing with, it could wipe out the major revenue months for seasonal rental companies. Obviously, this will require some out-of-the-box planning. Rental companies with a 12-month construction season have less to worry about, but still need to go through the planning process.
Can You Generate Sufficient Cash Flow?
We covered a game plan for 2020 a few months ago, 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.
Not only are we dealing with a very serious health issue, but one that also created supply and demand shocks that seldom appear simultaneously. A supply shock means supply is not meeting demand, like in the ‘70s when an oil embargo reduced fuel supplies and generated extreme price hikes. A demand shock is when demand falls after supply has been built up. Currently, because of the coronavirus, we find supply chain companies on both sides of the equation running low on cash and facing bankruptcy, all of which will negatively impact the U.S. economy.
What this all boils down to is your ability to generate adequate cash flow to pay the bills and run the business. Depending on what happens with construction work, you may have four to six months where work is restricted, rental pricing goes soft, used equipment values fall, new equipment finds fewer buyers, and a cash balance gets smaller every month. Are you generating enough cash flow to work through six months of chaos? Well, it’s time to find out.
Develop a Cash Forecast
Start by getting your management team together to prepare a “to do” list. Include your attorney, accountant, CFO, and other management members. Next, contact every customer to obtain a project status report and summary of how their company is doing to get a feel for their ability to generate cash to pay your invoices. Any potential problems should be conveyed to the management members.
Since the major issue is cash flow and cash availability, get someone working on a cash forecast. Take into account:
- historical payment cycles and estimated billing cycles adjusted for information received from customer calls;
- poor paying customers;
- estimated new and used equipment sales;
- and potential customer service work.
That covers the revenue side. On the payroll and expense side, decide which vendors must be paid and those that can be stretched. Also consider using credit cards to push expense payments further out. As for payroll, make sure you know what you are paying for and restrict overtime. Next, move on to the banks and finance companies, where you may have to ask for a change in payment terms for a six-month period, either interest only or zero payments for at least three to four months.
Your cash forecast should be done within 48 hours, using the assumptions laid out during the management meeting. After that, adjustments can be made based on actual results and discussions with customers and vendors. If you do not have the expertise in house to get this report completed, lay it off on your accountant but with the same completion time required.
What to do if Forecasting a Shortfall
If the adjusted cash forecast indicates you can make it through four to six months, check it daily and adjust as necessary as new information about customers, projects, and materials come to light.
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 be able to move ahead to recover what you have lost. But this is where it gets tough because you are going to have to make hard decisions about employees, vendor contracts, and other expenses, and if they need to be eliminated for a short time or for good.
Hopefully, Washington’s plan to provide liquidity works at the level where you can avoid the really hard decisions. (See Step-by-Step Guides for COVID Employer Tax Credit, Disaster Loans from U.S. Chamber.) If not, or if it’s not enough, you can consider a downward adjustment when it comes to payroll for a set amount of time, or you can lay off people for a set period. With the possibility that jobsites may get shut down, you may have to lay off personnel in any event. One more option is a straight payroll reduction for all employees that allows you to keep talented workers.
Also review rental cost of sales, office payroll, and operating expenses. Pay particular attention to your parts situation. Do you have what you need to maintain trucks, rental units, and customer units? It isn’t safe to assume parts will be available in the same way they were six months ago.
Other issues to consider:
- Interest rates
- Personnel policies
- Underutilized equipment
- Interest rate reductions
Make sure you are not overpaying for materials ordered three months ago. Sell off underutilized equipment for generate cash. Make sure you comply with all federal and state employment issues. And consider shifting to local or national suppliers going forward to avoid problems resulting from goods being manufactured and shipped from overseas.
I hope and pray we all get through this without any major negative setbacks to your health and finances, but this a live or die situation for your company as well. Don’t be afraid to suggest or implement adjustments that get your cash flow to where it needs to be.