Monitoring Cash Flow and Working Capital During Uncertain Times

With things changing rapidly every day and every hour since the onset of COVID-19, there are a lot of quick and tough decisions being made by owners and management of businesses across the United States and the world. We have been working with our clients who are in various stages of their own processes of reacting to our current economic reality. Here are some things to consider as it relates to the manufacturing and distribution industry.

TALK TO YOUR BANK AND INVESTORS – At this point everyone should have at least had a preliminary conversation with their banks. As plans change and you learn more from your customers, vendors, and the impact of your business decisions, updates should be provided to make sure you have their support and access to working capital if needed. If you have access to additional funds from your line of credit today, you should consider drawing down on those if you expect to be needing additional cash over the next two to three months. Some banks have already offered deferrals of no principal and interest payments, or are working through seasonal increases on the line of credit or temporary borrowing base increases to assist their clients in working through these financial changes.

PREPARE A 13-WEEK CASH FLOW FORECAST– We all know it’s impossible to predict what outcomes will occur as things progress, but you need a forecast to determine worst-case scenario. This is the only way to determine working capital needs and minimum fixed costs to estimate what the financial reality is for the next several months. In order to obtain the support you need to make the tough decisions necessary in this environment, banks, investors, the SBA and CARES Act will require information regarding financial projections in order to support you with additional funds should you need to ask for it.

REVIEW KEY AND NON-KEY PERSONNEL – After preparing your forecast, you’ll be able to determine how much money you might need to cut in order to make your way through the next several months. With that information in hand, go through your organizational chart and make decisions on which employees are essential and which are not to your ongoing operations under the “new reality.” Act quickly and decisively. Clients who have made decisions to lay people off as early as 10 days ago, have already said it was a great decision as they’ve saved tremendous dollars before their business slowed down dramatically.

REFORECAST PRODUCTION AND BACKLOG – With hotels, restaurants, retailers, etc. all cancelling orders, closing for business, or delaying requests for shipments for weeks on end, it’s recommended to maintain your updated backlog. We have had some clients be very successful in asking their clients not to cancel but just delay their orders, to keep the order in the backlog, and hopefully retain the business in the future. Some clients have been successful in offering discounts to avoid complete cancellations of orders, as business will eventually return after the COVID-19 dissipates.

REVIEW MARGINS ON PRODUCT LINES – We’ve seen multiple clients shifting their business model to react during these times. The first step is to review your product lines to evaluate which are your most profitable, or the highest-volume movers, and shift operations in those directions. Some clients have shifted their production to sectors of the economy they were not in before to target more sales and improve cash flow. Although this may only be a temporary shift in your business model, moving product and generating cash will get you through the next few months.

ACCOUNTS RECEIVABLE CREDIT INSURANCE – If you have accounts receivable credit insurance, ensure all of your accounts are within your coverage limits. We have seen some clients in the past that did not have controls in their system to monitor sales to customers over coverage limits, and this can result in an exposure to accounts receivable. Go through your entire accounts receivable listing and check on your insured customers; if any client on your accounts receivable credit insurance is at or near their limit, make sure your sales personnel are aware and controls are in place to limit your exposure.

FREIGHT CONTRACTS AND LEASE AGREEMENTS – Consider renegotiating your freight contracts and lease agreements as things evolve. There will be an abundance of supply in the transport and real estate industries as businesses fail who could not recover from the negative impacts of the economy, leading to an opportunity to lower future costs.

EXHAUST OTHER FINANCIAL OPPORTUNITIES – The small business administration (SBA) is providing loans, and The CARES Act will create financing and forgiveness programs. While the process is extremely fluid with potential future revisions to The CARES Act next week, it is important to act quickly and provide as much information as possible to get into these programs. It is still not clear how or when the SBA or CARES Act will grant access to capital, so continue to review your current options before relying solely on these avenues. There are also various state-specific programs for businesses affected by the COVID-19 crisis to access working capital.

This summarizes the key moves that our clients are in the process of making. It’s important to act swiftly and decisively to minimize exposure. As there is still a lot unknown, be flexible in your decision-making process in order to maximize new opportunities in the economy- it will turn around.