For companies that are struggling, a rapid Financial Health Assessment is the first step on the path to weathering the current economic crisis and being positioned for a successful future when business reopens. This four-step process will give you a clear picture of:
- Your current cash flow and operational liquidity
- Where your money is going and where you can cut expenses
- How you can ease current loan challenges or get emergency relief
- An effective AR/AP action plan based on the health of your cash flow
Step 1. Forecast Cash Flow
How much cash do you have on hand? And how long will it last?
These are critical questions that every business should be asking right now, especially those that are struggling. You need to have a cash flow forecasting process in place to know where you are.
Right now, it’s all about how long your company can survive. To do that, the first thing to do is look at your 13-week cash flow projection, with a focus on operational, rather than GAAP, cash flow. This meets two needs:
- Gives you a better understanding of where your business really is.
- Allows you to use the same terms that lenders will to assess your current operational liquidity and whether you have access to additional liquidity through your credit line.
If you’re going to be in trouble, the cashflow forecast will give you a signal: When is your stopping point? Many struggling companies have just been shutting everything off and paying only what’s absolutely necessary to stay alive—they’re going on life support—hoping it will be enough to ride out the “safer at home” mandates.
Companies are also doing everything they can to preserve the cash they have—or have access to. For example, some companies have drawn down all of the available funding from lines of credit while they are still available. Even if they think they might default, they’ve made the calculated decision to do what they have to do today to survive and manage the fallout later.
Cash flow forecasting is not a one and done activity. You need to refresh your forecast on a weekly basis, updating your assumptions as variables change.
With uncertainty about when businesses will reopen, weekly assessments are critical in aiding in your decision-making.
Step 2. Analyze and Manage Expenses
How can you cut costs now while protecting opportunities for future growth?
Once you have a handle on the details of your cash inflow and outflow, you can use that to analyze spending. We don’t know how long this is going to last, so where can you strategically cut costs to manage your expenses? When you’re in crisis mode, you need to do this quickly: Figure out where most of the money is going and then drill down on where you can save. What are your biggest categories?
As we’ve seen in the news, retail, restaurants, travel and other hard-hit industries are taking drastic action to slash expenses and preserve cash:
- In addition to tapping a $2.5 billion credit line, Macy’s closed stores until further notice and furloughed most of their 130,000 employees.
- The Cheesecake Factory also furloughed thousands of employees and told landlords they would stop paying rent—as have Urban Outfitters and other retailers.
- Marriott International is closing restaurants and entire floors of their hotels, as well as reducing staff, cutting salaries and administrative costs and drawing down a $4.5 billion credit line.
It’s important to be as transparent as you can. Even if it’s bad news, it’s better to be upfront.
Drastically cutting expenses might be necessary to protect your company’s finances, but when you do take actions like these, clear communication is critical. It’s important to be as transparent as you can. Even if it’s bad news, it’s better to be upfront. If you’re not able to pay vendors or employees, let them know now, so it’s not a surprise.
Step 3. Assess Your Loan Portfolio
What is your current loan status? How could you alleviate challenges?
Start by getting a complete picture of the loans you already have—as well as others that might be available, including government loans. If you’re unable to maintain your current payment terms, it’s important to be upfront with your lender. Don’t wait to begin the conversation with your lender until it is too late. If you think you’re going to be in trouble, ask for a deferment or try to renegotiate.
Beyond your existing loan portfolio, you might need to tap additional sources of emergency funding, including government relief. The CARES Act provided a range of support for businesses of all sizes, including:
- Paycheck Protection Program (PPP) loans for companies with up to 500 employees.
- Low interest rate loans for midsize companies (500 to 10,000 employees) with no requirement to repay principal or interest for six months
- Deferred payments for the employer portion of payroll taxes
Determining whether or not your business qualifies for these COVID-19 emergency relief programs should be part of your financial assessment. But as with any government program, the devil is in the details, and it pays to understand the terms, especially when you’re deciding where to cut spending. For example, the PPP loan may be forgiven if 75% is used for payroll and payroll-related expenses, while reducing headcount could affect your eligibility.
Thanks to overwhelming demand, particularly for the PPP loans, the status and availability of these programs has remained in flux. In addition to ongoing legislative developments, our team is closely tracking program requirements and restrictions to be sure our clients have access to all of the financial support that is available to them.
Step 4. Review Accounts Receivable and Accounts Payable
How is the health of your AR? Is your AP manageable?
From a cash flow standpoint, it’s very important to understand who owes you money and, in turn, who you owe money to. Are there critical vendors or suppliers you should be contacting now to negotiate extended payment terms? Be upfront with them if and when you realize you’re not able to pay them on time.
If your customers are struggling, it’s better to know in advance that you won’t be able to collect the accounts receivable in a timely manner. And just as you’re asking your vendors for leniency, you want to work with your customers. You want them to survive this crisis, too.
Prepare for a Return to Financial Health
As we talk with clients who are uncertain about how to get through the current crisis and emerge on solid footing for the future, we’ve been sharing a few key takeaways:
We don’t know how long this is going to last. The crisis could extend into the summer. It’s important to have a contingency plan that accounts for different outcomes—including a potential worst-case scenario.
Do your Financial Health Assessment now—and do it quickly. This is a rapidly evolving process, so the sooner you assess your current situation, the better you can prepare to weather the crisis and return to financial health.
If bankruptcy is inevitable, it’s better to prepare now. That way you’ll be ready to move quickly when everything reopens.
Regardless of your situation, we’re here to help. Our Restructuring and Bankruptcy experts are ready to collaborate virtually to conduct a Financial Health Assessment—in weeks, not months—and set up a weekly process for managing 13-week forecasts.
Links for reference
3. Cheesecake Factory
Editor’s note: Based on rapid developments in CARES Act funding, this article has been updated since it was originally published on April 9, 2020.
This post was authored by Thora Thoroddsen, an industry thought leader on Restructuring & Bankruptcy