First, do no harm. The shutdown of businesses by government order was sudden. Most companies were unprepared. Decisions made quickly that are not carefully thought through can create liability down the road that make it harder to turn the company around once businesses start operating again. For instance, the Workers Adjustment and Retraining Notification Act (the “Warn Act”) requires employers with 100 or more employees to provide 60 days written notice before laying off 50 or more employees during any 30-day period. Some states have more stringent Warn Acts. For instance, the New York Warn Act applies more strictly to companies with 50 or more employees who lay off 25 or more employees in any 30-day period.
Cash is Everything. It’s important to make a plan to conserve cash and cut expenses. Cancel orders that can be canceled and consider terminating burdensome contracts. Much inventory will be outdated by the time business turns back on; consider returning inventory or selling it wholesalers to recoup cash.
While you are getting your arms around your outflows, you need to understand your inflows. Scour the books for accounts receivables that can be collected. Focus on the larger accounts and do what you can to get those obligations paid.
Create a Cash-Flow Model. Create a 13-week cash flow model considering how much cash you have; how much will come in near term; and how much you need to operate. Consider your expenses carefully – are there expenses that can be pushed to third quarter? Many companies are moving to a “mothball budget”. What will it cost to turn out the lights and shut it all down for the duration of the pandemic? Also, what will it cost to turn it back on or maintain equipment?
Understand Your Options. Assuming your business is like almost every other business in America, you are accumulating operating expenses with little to no revenue. You may be able to weather the storm in the short term, but no matter what, you are borrowing from tomorrow to pay for today.
- Gather your important documents. You are going to need them. Loan documents, insurance policies, important vendor agreements and similarly important customer agreements. These documents will be critical as you form a plan to weather this storm.
- Draw the Revolver. If you have an available bank line, now is likely the time to draw it down. Better to have the cash on hand than risk the bank terminating the line when you need it.
- Cares Act of 2020. Try to understand your options under the CARES Act of 2020. There are a lot of loan options built into the CARES Act for small businesses. But don’t assume it’s your salvation. There are limited options in the Cares Act for insolvent companies.
- Review your insurance policies. A few states are considering retroactive laws to require business interruption insurance to cover the pandemic. Review your policy carefully and determine if there is an argument to made for coverage.
- Negotiate with the Banks. Don’t be afraid to call the bank and ask for a loan modification. The CARES Act of 2020 has several provisions that allow a bank to modify the loan without complying with the GAAP requirement to recharacterize the loan as a troubled debt restructuring. Moreover, the FDIC is encouraging banks to provide short term repayment relief by simply extending the maturity date on loans that go unpaid during the pandemic.
- Negotiate with your landlords. Don’t be afraid to ask for an extension or a grace period. Many landlords will negotiate with you. It’s better to have a tenant paying something than an empty store front or warehouse.
- Negotiate with your vendors. When you open the ledger and review the list of trade creditors to whom the business owes money, the thought of calling them to negotiate terms can be daunting. It’s important to remember that as a general rule, 80% of your accounts payable will be owed to 20% of your vendors. In that same line of thinking, if you owe a creditor a small amount, you are probably not a high priority for them as they seek to collect on their own accounts receivable. Focus on the big dollar obligations and working with these creditors to make a plan. Don’t be afraid to show them the budget you prepared with the cash flow projections. If you want to get concessions, the creditor will want to know he or she is not being hood winked. If you have been a good customer, the creditor will want to work with you.