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13-Week Cash Flow
As the world faces and attempts to absorb, the realities presented by the Covid-19 health crisis, businesses and in particular small businesses, need to be focused on survival.
The most important survival step to take, after ensuring the safety of the team, is to protect, as much as possible, the company’s cash position. Do whatever you can to cut costs and maintain liquidity. Re-focus on your core business and pause or eliminate any unnecessary projects which may be viable in the long-term but utilize short-term liquidity. Talk to your lenders as soon as possible to discuss your plans and the availability of loan relief options if needed. The goal is to “survive today in order to thrive tomorrow.”
Tools for the Battle
Management needs to consider the tools it will utilize to fight the battle. We recommend the “rolling 13-week cash flow analysis”:
- The rolling 13-week analysis is usually prepared in Excel and can be a simple or complex depending on your desires and the complexity of the business; there are even some templates that can be found in a quick Google search to jump-start the effort, or found here.
- The spreadsheet contains 13 columns representing the next 13 weeks. The rows will be dependent on the relevant cash in and cash out categories for your business.
- Preparing the analysis can provide critical insight into how much cash your business generates, from where, and when you can reasonably expect it. The exercise also provides a thorough assessment of cash needs and the timing of cash outflows. Once all of the data points of expected cash inflow and outflow are captured in the analysis it will normally highlight critical management decisions that must be made no in order to protect your cash flow position and provide for survival.
Critical Management Decisions
Some of the actions a business can take to manage cash flow utilizing the 13-week analysis include:
- Working with customers to understand the new collection cycle
- Negotiating with vendors for extended payment terms
- Allocation of critical and non-critical vendors for decisions regarding cash outflows
- Timing of workforce reductions or ramp-ups
- Negotiating with lenders to address a temporary liquidity hurdles
- Communicating an overview of the situation with key business stakeholders
Traditional Tools vs A Non-Traditional Crisis
Because of the effects of Covid-19 across all businesses, typical cash management tactics may not provide much relief. Some customers may not be able to pay their receivables and vendors may be looking to accelerate your payment rather than extending your terms.
However, the rolling 13-week cash flow analysis can and should be adjusted to your current expectations for cash coming in and cash needs so that you can clearly communicate the situation and possibly turn to other sources to manage your cash position if needed.
SBA Disaster Loan Program
As you may have heard, the Federal government, through the Small Business Administration (SBA), has programs available to assist businesses during these crisis. The SBA is currently providing disaster relief funds for a variety of disasters including Covid-19. Making use of the programs that are available to you can help increase cash inflows and may temporarily or permanently decrease cash outflows.
CARES Act
On March 27, the President signed into law the largest stimulus package in the history of our country. There are numerous tools offered in this law to help ease the financial impact of COVID-19 on businesses. A summary of some of the programs that can provide cash flow relief under this law follows however, this is not all inclusive and further discussion with your CPA can help identify the right approach for your business.
- The largest benefit available in this package for small businesses is the Paycheck Protection Program which provides qualifying small businesses federal-guaranteed emergency loans that can be used for payroll costs for domestic based employees, mortgage or rent payments, utility payments and certain monthly debt obligations. The maximum amount of the loan available is the lesser of $10 million or the borrower’s average total monthly payroll costs (subject to certain limitations) for the previous 12 months times 2.5. If certain requirements are met these loans are eligible for forgiveness.
- The CARES Act has another helpful program for subsidized SBA loan payments whereby businesses with and SBA 7(a) loan may be eligible for the SBA to provide payment of principal, interest and fees for a 6-month period beginning with the next payment due on an eligible loan. This is a subsidy program, not just a deferment of payments.
- The package temporarily lifts the limitation on the use of business losses put in place by tax legislation passed in 2017. Allowing certain benefits to pass-through entities and corporations by utilizing losses from 2018, 2019, and 2020 to offset income
- The CARES Act provides deferment of matching employer social security (6.2% of taxable wages) through December 31, 2020 with payment of the deferred taxes due 50% at December 31, 2021 and 50% at December 31, 2022. This is subject to certain limitations and is not available if the business is taking advantage of the Paycheck Protection Program.
- The Employee retention credit is another opportunity that provides payroll tax credits for employers keeping employees on the payroll when the business is shut down or significantly impacted. This is also not available if taking advantage of the Paycheck Protection Program.
Bank Loan Modifications
The banking regulators have indicated that they intend to ease restrictions that borrowers might normally face when seeking a loan modification. According to a March 22 joint statement issued by multiple agencies (Federal Reserve System Board of Governors, the FDIC, the NCUA, Office of the Comptroller of the Currency, Consumer Financial Protection Bureau, and Conference of State Bank Supervisors) regulators will not automatically categorize all Covid-19 related short-loan modifications as troubled debt restructurings (TDRs). This is an important benefit for businesses trying to manage through the financial impact of Covid-19. Normally, when a loan modification is classified as a TDR this could limit the ability to make future modifications to the agreement and triggers a set of financial accounting and reporting rules in order to properly reflect the substance of the TDR.
According to the joint statement that was issued, short term loan modification of less than six months, including payment deferrals, waivers, extension of repayments terms or other delays in payment, would qualify for treatment under the eased restrictions. However, borrowers need to be considered current, generally less than 30 days past due on their contractual payments at the time a modification program is implemented. We recommend that you reach out to your financial institution before you fall out of good standing.
Clayton & McKervey has assembled a list of resources to help; available on the home page of claytonmckervey.com. In addition, please contact your point of contact at the firm for more information.
The above represents our best understanding and interpretation of the material covered as of the date of this post. Things are moving at a rapid pace, and as such, information is subject to change. This information is provided for informational purposes only and is not intended to be a substitute for obtaining accounting, tax, or financial advice from an accountant.
