16 Immediate Actions Company Owners Should Take to Protect Their Business' Financial Health During COVID-19
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The World Health Organization declared COVID-19 a pandemic on March 11. Suddenly, most of the world began to take it seriously and our lives were upended – in many cases, home-bound, too.
Of course, an industrial business owner’s primary duty is protecting the health of employees, managers, their families, and themselves by following health authority recommended protocols. Next comes ensuring the economic health of the very company that employs and feeds them all.
Many companies face an existential threat. Sadly, some won't make it.
As our hospitals are increasingly operating in triage mode in response to the spreading virus, so too must many companies to remain fiscally fit during an economic catastrophe.
Here are 16 protective actions business owners should take to protect their companies during this challenging time.
1. Short Term Tactical Scenario Planning
Just as the National Institute of Health and the Center for Disease Control are modeling different scenarios from optimistic to catastrophic, businesses should convene the senior management team remotely and frequently via video conferencing to do something similar. Short-term, day-to-day decisions and measurements such as many described below will only be sustainable with their buy-in and commitment to frequent updates and the flexibility afforded by very frequent group communication.
2. While Optimism Has Its Place, Plan for a Recession
Human nature tends to ignore warning signals and least desirable scenarios, preferring a more emotionally rewarding optimistic outcome. Remember all the formerly credible, eternally optimistic “experts” trying to convince the public – and themselves! – that the mortgage market was infallible in 2007 and could go nowhere but up? It was more emotionally rewarding to believe them over the cautions of a few doubters.
Don’t be pulled into that trap.
Think of a worst-case scenario and map out its implications throughout the company and associated value chain. Review major customers and suppliers individually to consider ‘what if’ sensitivities.
For example, if your company provides new product development and/or introduction services to early-stage companies dependent upon outside funding, it is safe to assume that funding may be diminished or eliminated. The company itself may be short-lived.
There is a widespread expectation among the economic and financial community that recession is at our doorstep – its severity and duration, however, are harder questions to answer at this stage. 58.5% of economists polled by the Wall Street Journal in March expect it this year.
Moody’s Investor Service changed their outlook for North American non-financial corporations from stable to negative, reflecting their “expectations for the fundamental business conditions in the industry over the next 12 to 18 months.” The negative rating cites the expectation of “US GDP growth of less than 1% or on negative trajectory.”
Globally, Moody’s forecasts that the G-20 nations’ real GDP growth will contract 0.5% in 2020, versus a November 2019 growth forecast of 2.6%. For 2021, they project a rebound to 3.2%.
3. Focus on Cash Flow
This task needs to be second in priority only to maintaining health and safety. The need to monitor and maintain cash flow is obvious; specifics of how to do it may not be.
Communicate with customer and supplier representatives frequently to learn of illness or other possible reasons in which orders or supply may suddenly cease.
Here are the top five cash management suggestions excerpted from a substantially more detailed survival guide published by accounting firm SingerLewak. Importantly, balance the delicacy of immediate liquidity requirements against long-term supplier and customer relationships.
- Manage your cash flow and build it out by quarter for the next 16 weeks.
- Manage receivables by going beyond normal practices of just running a credit check on new customers; consider doing orders on a COD basis.
- Stop shipping new orders to customers until payments are made on aged AR, be strict, and consider shortening payment terms. Consider early payment discounts.
- Project critical uses of your cash for required payments (bill payments/payroll).
- Manage your payables and consider using vendors as financing options.
4. Create a Database of Contractual Payment Obligations
Contract-termination dates, time by which notice to do so must be given, the presence of auto-renewal clauses, minimum payments, and mechanism required to terminate – such as written notice – should be entered into a database.
Review each agreement for its criticality and price favorability. Consider whether it’s appropriate to renegotiate based on current circumstances. However, don’t forget that your suppliers are hurt as badly as you and fairness to both parties remains critical. Suppliers will have a long memory for their customers who tried to take them to their knees when times were tough.
5. Manage to Liquidity and Solvency Ratios
That which is not measured is not managed. When cash flow and ability to meet obligations become essential to survival, it is especially important to watch key financial ratios carefully and take corrective action as needed.
Liquidity analysis measures a company’s ability to meet short term obligations; in other words, it assesses how quickly assets are converted to cash. Solvency ratios measure the company’s ability to meet long-term debt obligations, i.e. the adequacy of earnings and cash flow to cover interest expenses and other fixed charges (like leases) as they become due.
There are several ratios of each type, but here are a few critical measures as a starting point:
- Cash Ratio – A reliable measure of a company’s liquidity in a crisis, it is calculated as cash + short term marketable instruments (publicly traded stocks, for example)/current liabilities. The larger the result the better. One means no room for anything else to go wrong and <1 should suggest a “hair on fire” priority.
- Defensive Interval Ratio – How long the company can pay its expenses from its existing liquid assets without additional cash inflow. Calculation: cash + short term marketable investments + receivables/daily cash expenditures. This will indicate how many days the company can pay its operating expenses before running out of “quick assets” (cash + marketable instruments + receivables) or bringing in more cash. Startups call it “burn rate.”
- Fixed Charge Coverage – Earnings before interest and taxes (EBIT) + lease payments/interest payments and lease payments. This relates fixed obligations to the cash flow generated by the company, how many times the company’s earnings before interest, taxes, and lease payments can cover the company’s interest and lease payments. A higher ratio implies greater solvency.
6. The Cash Conversion Cycle
Firms that maintain parts, WIP, and finished goods inventory benefit greatly by analyzing, closely monitoring, and managing to their Cash Conversion Cycle (CCC), an “activity ratio’ that measures operating efficiency.
The CCC mechanism has always been important for industries that operate with tight margins like Electronic Manufacturing Services (EMS) and semiconductor manufacturing, but firms unaccustomed to such tight parts and WIP inventory control should consider it. Retaining pre-assembly parts for long periods to enable Just-in-Time delivery may no longer be viable.
Its principle is simple: measurement of the time gaps between money flowing out of and into the company. It is expressed formulaically as (Days Sales Outstanding + Days Inventory Outstanding) – Days Payables Outstanding.
I have published a one-page step-by-step instruction on how to perform this calculation.
7. Consider Modifying Your Supply Chain
Supply chains were already out of whack due to global trade disputes and tariffs, but now the availability of needed items may be severely limited or delayed. This is especially the case for Chinese goods. Fortunately, China is slowly returning to work, with many factories reopening each week.
One of the numerous questions about this virus is whether it is likely to return on a significant scale when the weather turns cold again. It might. Chinese factories may shut down again.
Plan for the possibility.
Consider whether your supply chain is overly dependent upon any geographies and whether it is feasible to diversify supply sources. In any case, diversification is wise as they may get sick, too. Consider alternative suppliers and have your staff vet and onboard them so the company is prepared if sudden shortage necessitates.
8. Tap Existing Credit
Take advantage of any revolving line of credit your company may have to strengthen your balance sheet. Tap it, as this is one of the best reasons to do so. Many companies are doing this to the point that some in the banking community are beginning to express concern about all that liquidity moving from the banks to the business community at once. It may be prudent to make this move sooner rather than later in the event barriers are erected.
Note the section below on Covenants to ensure you don’t violate any.
9. Evaluate Payroll
The hardest decision to make may be to cut staff. Marginal performers may make it a bit easier to cut a selective few. The issue is especially problematic in industries like advanced manufacturing which already suffer from such a shortage of qualified staff to the point that sometimes customer orders and growth potential cannot be fulfilled.
If an absolute existential necessity, consider making temporary wage reductions. No employee will like it, but probably all will understand if there is a history of transparency and trust.
10. Study the New Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act" or the "Act"). This act has many provisions to help businesses and individuals. Study it to determine if any provisions apply to your industrial business.
11. Consider a Loan
A provision of the CARES Act is that small businesses with no more than 500 full or part-time employees (per physical location) are eligible to receive a Small Business Administration (SBA) loan of up to $10 million (the exact amount is tied to payroll costs) between February 15, 2020, and June 30, 2020. The normal cap is $5 million.
These loans may be used for:
- Wages
- Payroll costs
- Paid leave
- Costs related to the continuation of group health benefits
- Mortgage payments
- Rent
- Utilities
- Interest on other debts
Some loans may be eligible for forgiveness if meeting the required conditions. No collateral or personal guarantees are required. The loans are made through banks, underwritten by the SBA, but banks are getting overwhelmed.
Alternately, some companies may qualify for debt beyond what a bank or SBA will provide. When the banks froze credit during the last recession, they opened the market for non-bank lenders. We have access to numerous lenders of all types and can arrange financing for most needs.
12. Review Your Insurance
Your business interruption insurance policy may apply to losses incurred by this virus. Specifically, investigate whether it covers losses due to supply disruption preventing your company from fulfilling sales orders.
In any case, it would be wise to contact your agent as insurance companies are equipped to provide free and valuable business continuity planning guidance.
13. Review Your Debt Covenants
If your company has an outstanding note, it may have covenants that require certain levels of performance, such as maintaining earnings before interest, tax, depreciation, and amortization (EBITDA) above a pre-determined threshold during the term of the loan or restricting additional borrowing. Violation constitutes default, and the lender can decide to call the loan due in full, renegotiate, or waive the covenant.
It is wise to reread the documentation and contact legal counsel with a financial transactions practice (preferably the attorney originally involved in the original loan transaction), before then following Counsel’s guidance and contacting the lender proactively to ask for a waiver.
14. Plan for Employee Absenteeism
At best, many employees will be working from home for a while and at worst, many of them will fall ill. Consider establishing backup performers of critical functions, then a backup for the backup. Perhaps it is prudent to establish relationships with qualified independent contractors in the event of sudden need.
15. Plan for Business Continuity/Illness Contingencies
What happens if the owner(s) of the company gets sick? Any publicly held company’s analysts and shareholders will want reassurance that the company has a clear business continuity plan, including contingencies for leadership succession should senior leaders contract coronavirus – particularly if over age 60.
Private company stakeholders, e.g. owners’ families, the employees, and customers deserve the same.
16. Plan Strategically
Take advantage of this downtime to think strategically about the business, its capital and operational spending needs, and shareholders’ personal financial and lifestyle goals. Often owners are so wrapped up in the day-to-day operation that they neglect the big picture.
Circumstance warrants it especially now. There can be opportunity in a downturn, such as growth through M&A.
Major decisions, such as accelerated retirement, a private equity-funded management buy-out, realistic assessment of the ability to invest in necessary growth initiatives and technologies, or outright sale need to be considered. The worst outcome for non-operator shareholders and/or employees would be an owner/operator not up to the task of managing the company through the downturn and returning to growth runs the company aground when other ownership could have kept it afloat.
Though some of the underlying factors and reasons have shifted, and uncertainty universal, for owners not inclined to continue running the company for most of the 2020s, starting the M&A preparation process now is probably still the best thing to do, as most factors did not change.
Please note that we will be donating a portion of our investment banking transaction fees to a fund benefitting healthcare workers, so if we represent your company you will know that you are helping others while helping yourself.
This article was written and contributed by McGavock Dickinson Bransford, CM&AA, managing director with investment bank Mid-Market Securities, LLC. He advises and writes articles pertinent to owners and shareholders of mid-sized companies.
Image Credit: Blanscape / Shutterstock
