8 Key Questions Small and Medium-Sized Businesses Face During a Downturn
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With the COVID-19 outbreak comes unprecedented business and economic disruption and uncertainty. Companies are grappling with the impact on their customers, employees, and supply chain while dealing with uncertain financial markets. The highest priority for your businesses during this crisis is its long-term sustainability, and the best way to ensure that is to make it through the short-term. In times of crisis, we may have to retreat in order to save the long-term opportunity.
Here are eight questions you should ask yourself and our thoughts to help you evaluate your business and options amid the COVID-19 crisis:
1.) How do we assess, ensure and optimize our cash flow?
The best tool to manage your cash and the one your lenders will want to see is a rolling 13-week cash flow forecast. This begins with your actual cash balance and adds estimates of all your cash inflows such as the timing of accounts receivable receipts, known sales orders, and forecasted sales orders. From there deduct all cash outflows such as accounts payable (past, present and future), delineating by critical and non-critical vendors, and cash needed for payroll and benefits. Also forecast cash inflows and outflows from financing activities such as principal and interest payments on existing or anticipated indebtedness (including PPP and other near-term sources). Given the existing circumstance, you may also consider whether there are immediate needs to support key suppliers or employees with emergency loans. You can find a number of tools online and your accountant should be a helpful resource, but here is one YouTube video as a start.
A rolling cash flow forecast helps anticipate future cash flows and positions, while reducing surprises. It also shows you where to take action to improve your cash position by managing accounts receivable, negotiating vendor terms, planning for restructuring costs, and utilizing outside financing.
2.) How do we forecast in this new, uncertain reality?
If you are accustomed to performing an annual budget, get ready to do it monthly for some time to come. You should prepare forecasts on a monthly basis through the end of 2021 and annually thereafter through 2024. Realistic and detailed financial forecasting is a key tool in navigating uncertainty and informing the actions needed. Unlike annual budgets done in relatively stable environment, you develop several scenarios for how the pandemic might play out. No one knows how customers, suppliers, and employees will react nor the course the coronavirus with take. Have your team think through and model various scenarios and then develop a forecast based on the assumptions for each of those scenarios. The most important outcome of this process is gaining an understanding of what variables and actions are most impactful to your business. It’s the byproduct of the scenario-planning process that will allow you to be more agile in responding to unforeseen circumstances. Working through scenarios is a form of stress testing that will also establish credibility with key stakeholders. Plan on updating these forecasts monthly while events unfold and your team receives new data.
3.) How can we adapt our business model in the short- and medium-term?
There is no one answer for this, but you should be open to all options. A few questions you should keep asking yourself and your team are, “How does our company better fulfill its purpose and drive long-term value for all stakeholders, what are “how’s” and “what’s” that can be changed and the “whys” that cannot? Have we revisited old ideas that were once discarded, but might be ways to generate cash? What incentives can be offered to encourage customers to pay more quickly? Is there slow-moving inventory that could be sold if it was discounted? Are there one-time revenue opportunities, cost reductions, and working capital reductions that you can consider? Obviously, you want to defer CAPEX where you can, but don’t ignore new product ideas. In a time of crisis, the usual aversion to new products lessen as people become more accepting of new ideas. Generating cash is what is important; profitability is secondary.
4.) How do we communicate with our stakeholders - customers, vendors, and employees?
Address the issues head on. Everyone is weakened, so be sure to communicate promptly, clearly and transparently with key stakeholders throughout the crisis, sharing your challenges and how you are addressing them. Clear, prompt and transparent communication is essential to building trust. Not communicating and then hitting people with surprises at a time when they are least able to adjust is a sure way to lose a customer or key supplier for life. A strong crisis communication plan and team can help ensure the well-being of your people, keep resources protected and strengthen your ability to perform during these challenging times.
5.) How do we think about meeting covenant compliance and debt service requirements of our lenders?
Uncertainty makes accurate financial planning almost impossible. Stress testing and developing a range of scenarios, however, will help you see patterns and possible responses to adverse conditions. This will prepare you to pivot as the future unfolds; however, it is critical to know if you will trigger financial covenants or be unable to make debt payments. Doing either of these isn’t the end of the world. Covenants are a lender’s means of getting you to the table to talk and missed debt payments can be overcome if you provide a plan that shows how you will repay it in the future. Once you begin to have a feel for whether and when any of this might happen, proactively communicate with your lender, explain the scenarios and what you intend to do if they come to pass. Once again, proactive communication is the key that builds lenders’ trust in you and your team.
6.) Have existing agreements been reviewed to determine flexibility with upcoming payments?
Once you have developed a 13-week cash flow forecast, developed your scenarios, and have a better idea of your pinch points, the first places to look for relief is with your vendors and existing lending relationships. Can you extend payment terms with some of your vendors? Some may be more able to do that, and others may be in worse shape than you and may need your help. Remember, this isn’t binary. Everyone is in this together and will only get through it together. To date, banks other lenders have been accommodating to existing borrowers, offering an array of programs including fee waivers, deferred payments and other modifications depending on the circumstances. Most banks are planning on working with their customers to provide relief through loan payment deferrals or debt restructuring, but it will be on a case-by-case basis, so open communication is again critical. It builds trust and trust in their borrowers is what lenders must have in order to make accommodations.
7.) What access do we have to capital?
Access to capital is dependent upon a number of factors, but the size of your business will determine your range of options. Companies with EBITDA of $10 million or more will have many options from a range of bank and non-bank sources of senior and subordinated debt to private equity investors. Companies with $2 million or more of EBITDA also have a number of options for long-term financing, but if you have less than that your options diminish dramatically. If you have less than $1 million in EBITDA, your options are limited to banks, savings and loans, credit unions, factoring and purchase order financing organizations, friends & family, and angel investors. Royalty or revenue-based financing, a non-dilutive source of financing, might be an option and the SBA has a few lending programs, including a microlending program. Companies have accessed crowdsourcing, but you generally need a large social media presence and it is untested during a recession. There are other options that put the financing risk on the individual and can impact your credit or retirement. The risks of using credit cards, borrowing against the cash-value of life insurance, using a 401k account, and home equity loans are obvious, and many entrepreneurs have tapped these sources.
8.) Given lower valuations, are there scenarios under which acquisitions should be considered?
Despite efforts undertaken to mitigate the impact of COVID-19, it is an unfortunate but inevitable outcome that a number of businesses are going to be severely stressed or fail. Some may file bankruptcy, while others may put themselves up for sale or be open to a dialogue. These circumstances can present acquisition opportunities for stronger businesses that are weathering the storm that might not otherwise be available. Take some time to make a list of potential partners that would allow your company to expand your mission through mergers and acquisitions.
EPOCH Pi is a Certified B Corp and investment bank with over 25 years of meaningful experience advising in special situations to meet the needs of companies in periods of uncertainty and distress. Our services range from capital formation for growth companies to generating liquidity for existing shareholders. In every case, one of our criteria is the alignment of our client’s purpose and vision with those of the financial stakeholders. Learn more about us here or contact us to schedule a free call with one of our professionals.