Cash Management Tips to Help Entrepreneurs Survive The Pandemic

Cash Management Tips to Help Entrepreneurs Survive The Pandemic

  

by Luis de la Prida, Managing Partner, The NYBB Group

 

“Never take your eyes off the cash flow because it’s the life blood of business.”  This quote, uttered by businessman Richard Branson, is one that you have internalized to some extent if you run a successful small business.  That is why you are successful.
But if cash flow is an essential metric for you to track during normal times, it is of paramount importance in moments of crisis.  Not surprisingly, then, you have probably been preparing yourself to capitalize on many of the provisions and programs of the CARES Act the recently enacted $2.2 trillion dollar federal stimulus bill.
We discussed the Paycheck Protection Program and the Economic Injury Disaster Loans Program earlier this week. We also highlighted a couple of programs intended for companies with a presence in New York City.  Click here for information on the SBA Funding Programs.
These much-needed programs will hopefully dampen the impact that the Pandemic is having on your small business.  But even if you immediately applied for these programs and did so flawlessly, you are still going to need to employ good, old-fashioned cash management techniques to stay afloat during these times.  That is the focus of today’s newsletter.

 A Cash Management Primer   

You understand the concept of cash flow in its most basic sense.  It is the difference between cash coming into the business versus cash leaving the business.  You live this everyday and never more so probably than during the past month.  Whether you are deemed by your state to be either an essential or nonessential business, the Pandemic is probably wreaking havoc on your cash inflows.  Social distancing regulations, supply chain disruptions, and health concerns have a way of decreasing business activity.  Interestingly, none of this is necessarily decreasing your expenses.
None of this would necessarily be a problem if you knew how long the crisis was going to last. Some business research groups, such as The Conference Board, have given insight into three possible scenarios of how the crisis ends and economic activity resumes.  We encourage you to read their report, which is found here.  Alternatively, the online publication Inc., has a nice summary of the report.
Suffice it to say that estimates depend on how long the virus is going to last.  In the best-case scenario, the economy may begin to recover by May, according to The Conference Board.  In the second scenario, they project the economy to recover by July.  In the last case scenario, they envision a return to normalcy by September.  Again, this is just one prognostication.  It is anyone’s guess when the economy will recover.
Under any of the three scenarios, however, your business is being impacted.  The extent of the impact depends, to some extent, on the steps that you take to manage your cash flow.

Develop a Cash Flow Projection 

For that reason, one of the first steps that you should take is to do a cash flow projection.  Familiarize yourself with how much cash is currently flowing into and out of your business.  Once you know that number, try to project these cash flows out into the future.
Once you have these projections, take immediate action.  Analyze your expenses from highest to lowest, mandatory versus discretionary, and so on.  Begin by focusing on some of your more material or large expenditures.
 
Payroll Costs
Payroll is probably one of your more significant costs, especially, if you run a service-based business.  At the same time, we do not need to tell you that your employees can be your greatest asset.  So, you should take extra care as you consider these expenses.
You are going to want to find a way to manage this expenditure.  Look into the different government programs aimed at helping you maintain your staff.  Analyze the different ways to reduce these costs, if that is what makes the most sense for your firm.  Consult with your internal and external advisors to decide the best path forward.
 
Facilities Costs
Facilities related costs are one of the largest expenditures for most businesses.  If you lease space for your business, contact your landlord to inquire about rent abatements or deferrals.  If you own the space that you operate out of, contact your mortgage company to ask about any programs for loan forgiveness or deferral.  Consider refinancing to take advantage of any equity and or to obtain a lower interest rate.
As partners of The NYBB Group, we also own NYBB Commercial Real Estate.  This latter entity is a member of several commercial real estate organizations.  We are seeing requests for mortgage and rent relief becoming increasingly more common.  Quite often, landlords and lenders expect to be asked for either assistance or relief.  By being among the first to inquire, you may be one of the first to realize a benefit.  Asking also engenders goodwill, being that you were responsible enough to tackle the issue head on.
 
Refund via Checks instead of Credit Cards    
If your business processes credit cards and are giving refunds or accepting returns, offer to make the refund by check. This saves you the return merchant credit card processing fees, which can generally be approximately 3% of gross sales.
 
Offer Gift Cards to Customers  
Consider offering gift cards or gift certificates to your customers, perhaps at a modest discount to help even out cash flow.  Make sure these are recorded as contingent liabilities until redeemed.
 
Eliminate non-essential expenses    
Review your Profit & Loss Statement.  Look at expenses line by line.  Consider cutting any unnecessary costs that do not help either produce revenue or secure key business functions.
 
Tax payments   
The IRS is offering CoronaVirus relief to taxpayers.   Speak with your accountant to determine the best approach forward for you and your firm.  Deadlines to file and pay federal income taxes have been extended to July 15, 2020.
Alternatively, it may make sense to file early if you are expecting a refund.  That could provide you access to much-needed funds.  In 2015, it was reported that over $1.4 billion in tax refunds went unclaimed and were kept by the Treasury Department.
Here is an article from Anchin, a CPA firm, on how the tax provisions of the CARES Act Provide Broad Relief.  Note: The NYBB Group is not affiliated with Anchin.   

Use Assets to Generate Cash

We deliberately focused on controlling your expenditures first.  You may be experiencing problems bringing in cash through no fault of your own.  Even so, there are many things that you can do with your existing assets to generate cash.  These include the following:
  • Collect Accounts Receivable Sooner
  • Consider Factoring your Receivables
  • Offer customers discounts to get them to pay you sooner
  • Liquidate Excess Inventory
Return to your supplier any eligible inventory that has become ‘excess’ as a result of social distancing.  Cash is king, so conserve cash now.  You can reorder inventory later.  Your suppliers will be happy to sell it back to you.  Also, be sure to liquidate excess inventory or discard of stale, dated, or damaged goods.

Properly Capitalize the Business

Other SBA Programs 
If you have applied for any of the government stimulus programs, you already know the importance of borrowing or using debt financing to manage your cash flow and support your business.  Don’t overlook the fact that there are other sources of debt financing.  The Small Business Administration has other loan programs besides the PPP and the EIDL.
Traditional Bank Financing
Meanwhile, do not overlook banks and other lenders for more traditional lending products, such as term loans, lines of credit, and other credit facilities.  Credit markets are experiencing some turmoil at the time of this writing.  But borrowers with either good credit or collateral should have options.  Be sure to keep in touch with your banker.
Lend Your Business Money
Another way to raise cash for your business is to borrow it from your personal funds.  Personal and Home Equity Lines of Credit (HELOC) are two ways of achieving this.  So, too, is by refinancing your mortgage and cashing out some of the funds.
In addition, the CARES Act has liberalized some of the retirement plan rules.  For example, it waived the 10% penalty of early withdrawals from some IRAs.  It also expanded the amount that can be borrowed from a 401K plan.
Be sure to speak with your financial and tax advisors before lending yourself money, as these decisions can be complicated and have various tax and financial consequences.  Many advisors would only counsel you to lend your business money as a last resort.  Mortgages and HELOCs use your house as collateral.  And cashing in your IRAs may require you to do so in a down market.  Lastly, for most business owners their business, home, and retirement plan are their primary assets.  It may not be prudent to leverage your home and your retirement plan to bail out your business.
Equity Financing: Bring in Outside Investors  
Admittedly, the current environment may make it difficult to get outside investors to contribute equity to your firm.  However, difficult does not mean impossible.  Buyers continue to look for companies to invest in, especially companies in essential industries that are doing well during the crisis.
Nevertheless, we would not necessarily advocate that you sell your business during the crisis or downturn.  But divesting yourself of some portion of your real estate holdings or business could be a way to raise much needed funds.  It may also be a way to merge or partner with a company or entrepreneur with greater access to capital and resources.  They may take on greater importance to you if the crisis is prolonged and you lack the cash needed to continue to operate.
Note: Selling either a portion or all your business (or real estate) can take longer than you think—especially in the current market.  If this is something that you are seriously contemplating at any point over the next year, we encourage you to form your advisory team as soon as possible.

RE-ASSESS YOUR STRATEGIC PLAN FOR 2020  

If you didn’t make a Strategic Plan for this year, now is a good time to make one.  This is also a great time to make modifications.  Start on projects that have been on your wish list and re-evaluate your objectives for the year. Adjust the plan and outlook for 2020 as you know more about how the pandemic will impact your business.  You may be dealing with the impact of the pandemic for weeks or months.
By taking proactive steps to control your cash flow, you can minimize the impact that the current crisis has on your business.  And you may position yourself to take advantage of any opportunities that arise when the crisis is over.
As always if you have any questions or would like additional assistance please contact karen@nybbinc.com and we will have someone follow up with more information as it pertains to your business.

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