The Coronavirus outbreak has had major impact, and for many companies revenues have fallen off a cliff. Further, the uncertainty and likely disruption caused by pandemic will continue for the foreseeable future.
To weather the Coronavirus storm, companies should consider the following:
With seriously reduced revenues, companies need to find ways to conserve cash. This includes analyzing essential spending; idling operations; working with vendors, landlords, and suppliers regarding credit terms; and applying other methods. To maximize their liquidity position, companies must prioritize their use of cash.
Companies should consider the relative costs and revenues of idling operations temporarily until business activity normalizes. Companies will have to burn some cash to idle operations, but the cash may be less than that incurred in keeping a facility open with a skeletal staff.
Good relations with its trade creditors might enable a company to establish a standstill on “old” payables until companies can restart or normalize operations. In the event companies require some goods or services on a limited or one-off basis, arrangements may be made for C.O.D. or to source those needs with an alternative vendor.
Companies may have similar negotiations with landlords, and they should also review leases and contracts for applicability provisions or legal rights/excuses regarding performance. Until these landlord and contract issues are resolved, companies should consider deferring rent and contract payments at this time, especially where they are not receiving benefits or services provided under such leases and contracts.
Lack of liquidity reduces the range of options for financially stressed organizations. With the indeterminate length of Coronavirus disruption, cash provides additional time. That time really may be necessary for survival until the company normalizes and opportunities return. The federal government has passed stimulus and bailout laws and allocated funds that may assist. However, these stimulus dollars are not expected to make companies whole for their losses due to the crisis.
Communicate with Lenders
Companies should have a conversation with their lenders. If there is availability on lines of credit, discussions should include draw-downs to bolster liquidity. In addition, discussions may include interest payment deferrals, amendments, extensions, restructurings, and borrowing availability increases or additional loans.
If the lender indicates willingness to support the continuation of the business in these uncertain times, the company needs to be transparent and candid, and provide information and analyses of the various possible scenarios to establish credibility with the lender.
The growing levels of stress may make lenders more receptive to alternative options to maintain a going concern until the business normalizes. Lenders have incentive to work with companies to help preserve them.
Update Cash Flow Forecasts
Forecasts need to reflect the current economic environment, projected to account for reasonable upside and downside scenarios for the impact of the pandemic on operations—even including a potential second outbreak of COVID-19. These forecasts may be shared with lenders, depending on circumstances.
Understandably, the current economic landscape may make forecasting difficult, as the severity and duration of disruption in businesses remains uncertain. Further, depending on the business and its location(s), normalization of business operations may take additional time. Accordingly, for many businesses, ramp-up may extend over a period of time, and they may face further disruption from changing customer preferences or a second virus outbreak. Cash flow forecasts, however, must account for these uncertainties.
Companies should review their fixed and variable costs carefully and determine what costs are needed to run the business. Capital investment plans likely need to be revised and delayed. Companies need to assess their deferred expenses and make assumptions regarding the cost to ramp back up operations.
A 90-day cash flow analysis can highlight some of the critical decisions needed. The 13-week cash flow should be updated weekly and provide comparisons of actual against budget, making available detailed information in advance of the typical monthly financial close process.
In going through this deep-dive process, companies may evaluate their core businesses, capital structure, supply chains, rent obligations, vendors, etc., and assess whether substantive changes are necessary or advisable.
Discussions with Stakeholders
Companies should open communications with vendors, landlords and other interested parties to assure them that they recognize the challenges presented by the Coronavirus and have plans to address them.
In times of crises, communication with stakeholders remains vital. The stakeholders have their own concerns regarding the ultimate impact of Coronavirus on their businesses and investments. Open discussions regarding the issues and challenges presented by this crisis establish goodwill and demonstrate a company’s intention to work with its stakeholders. These discussions do not need to express definitive solutions to the challenges, but are intended to reassure stakeholders that the company recognizes the scope and severity of the issues and is contemplating various responses, depending how facts and circumstances firm up.
Review Labor Issues
Labor constitutes a significant operating expense for most firms. Companies need to focus on whether to furlough or terminate employees. Many businesses will likely have assessed these costs and benefits and made decisions; however, companies may need to reassess their decisions from time to time.
Companies should review insurance policies to determine possible coverage and comply with all applicable notice requirements.
Although the most obvious source, most business interruption and extra expense insurance usually requires some sort of physical injury or damage to other business property as a trigger to coverage. Such coverage typically is designed to apply where a physical event (e.g., a building fire) shuts down operations for a period of time. It is unclear whether a claim premised on the physical illness of people necessary for business operations and government-ordered closures would be accepted. This issue should be examined on a policy by policy basis.
In summary, businesses must take steps now to mitigate and address the impact of the Coronavirus. These steps include a number of tools and analyses which can and should be used by businesses to survive the current crisis.
Be sure to speak with your legal and tax professionals regarding the specifics on any CARES question and any potential legal tax issues facing your business. Flexicrew provides this information as a public service, but it should not be construed as either legal or tax advice.