Cash Flow Triage for Small Businesses during the COVID-19 Crisis

The COVID-19 Crisis has caused widespread uncertainty in the economy and greatly disrupted normal business activity.  We need to realize that there is going be financial pain for almost everyone.  We must also realize that we are “all in this together” and must make sacrifices to get the economy moving forward. In order to this, we must start with the basic building block of our economy which primarily consists of a wide variety of small businesses

This unprecedented economic slowdown, and in some cases stoppage of business, has created significant operating challenges for all businesses but particularly for small business.  While there are numerous problems and challenges facing a small business owner during the COVID-19 Crisis is the most critical is cash flow.

There are two basic ways a business can impact cashflow: 1) create additional income or 2) reduce expenses.  Some businesses have ample cash reserves or access to lines of credit to help carry them through the COVID-19 Crisis.  However, many businesses are not so fortunate, so they need to implement a plan of action to deal with the cash flow challenge.

You may be familiar with the medical term: triage.  This is the process of determining the most critical conditions from a larger number of conditions that require attention so action steps can be established to stabilize the patient.  In this case, the patient is your business.   By using the concept of a medical assessment, the rest of this document will highlight the steps you can take to perform a CASH FLOW TRIAGE for your business.  The following steps have been written in an easy to follow format that will help you triage the cash flow situation of your business and establish a plan to survive the COVID-19 Crisis.

However, the most important step as we to move forward, is communications.  Make sure you maintain communications with your customers, employees, lenders, vendors and suppliers.  Since the COVID-19 Crisis will impact everyone, we all need to help each other to move forward.

Cash Flow Triage

1. Establish a timetable.

In order to formulate a cash flow plan, a timetable needs to be established. For the purposes of the Cash Flow Triage, we will assume a twelve (12) week period.

2. How much available cash do you have?

Identify all existing cash accounts that your business can access.  This can include operating accounts, reserve accounts, revolving loans, lines of credit, etc.  It is recommended to NOT include credit cards.

3. What are your fixed expenses?

Prepare a list of all long term or on-going payment obligations.  This includes your landlord, mortgage holder, equipment leasing company, auto lender, bank loan, line of credit, credit card payment, commercial loan etc.

4. What is your normal operating activity?

Develop a spreadsheet to show your normal operating activity.  E-Mail Mark HERE if you’d like to receive a template. This will reflect your “normal” monthly operating activity and determine typical revenue and expenses projection for the next twelve (12) weeks.  These figures will become important as you develop a cash flow plan and estimate the potential negative impact to your business.

5. Create a COVID-19 Forecast

Put together a forecast or projection of what your business revenue and expenses (including normal employment costs) will look like over the next twelve (12) week.  Make sure to:

• Plug in your estimated revenue over the next twelve (12) weeks. The numbers will be far less than those from a normal operating period, but it is important to understand what kind of operating revenue you can expect over the next twelve (12) weeks. Be realistic when you estimate income during the slowdown.
• Include normal employment and operating costs.
• The objective is to identify cash shortfalls

6.  Cutting Costs to increase Cash Flow

It is important to have a full understanding of your employment and operating costs so you will be able to make the best triage decisions about managing these costs in such a way to generate cash flow over the twelve (12) week period. Looking at employment costs can be quite difficult but consider the availability of increased unemployment payments and the potential of individual Economic Impact Payments from the Federal government in April and May.

1. • Review employment expenses
     1. Consider a “furlough” option for certain full-time employees by going to a reduced work week during the COVID-19 Crisis. For example, have a three-day work week with three days of pay.
     2. Reduce or eliminate part time work until business picks up. While layoffs are not popular, it may open unemployment benefits for your employees and these benefits are being increased, communicate with your employees to let them know that you will bring them back as business picks up.
   • Investigate the potential for re-negotiating or restructuring existing long-term financial commitments for rent, loan payments, lease payments etc.
     1. Seek a Payment Holiday from your landlord and the company that leases equipment to you. Ask to skip one or two payments and then spread it out over the next 12 months.
     2. If you have a commercial loan, contact your bank and see if you can move to an interest only payment plan for the next 6 months and discuss extending the term of the loan
   • Communicate with creditors/lenders/landlords about payment plans
   • Juggle Accounts Payable

7. Identify Sources of Temporary Income

We do not know how long government restrictions to “self-quarantine” and practice “social distancing” along with restricted hours of operation will last.  But we need to make plans for an eventual recovery.  In the Cash Flow Triage, we are assuming twelve (12) weeks.  During this time the local and federal government will make available a set of financial resources to help small business weather the storm of the COVID-19.  Buy implementing the cost cutting steps from Step #6, you will have reduced operating costs, so you will be able to maximize the use of these temporary funds.

• Come up with a new product or service that you can offer that will meet your customers/clients needs during the COVID-19 Crisis. Be innovative and involve others (employees, customers and vendors) in coming up with ideas,
• Review your personal savings and determine if you might be able to invest or loan money to your business to help carry you through the twelve (12) week period
• Talk with your local banker and see if they are willing to establish a Line of Credit, with interest only payments.
• Review existing governmental programs to see if they might be a good fit for your business. As of March 20^th, these are all loan programs.  While most business owners do not want to take on additional debt, it may be the only alternative.  The interest rate and terms for these programs are very favorable and are structured to have a payment free period at the start of the loan period and low monthly payment with no penalty for prepayment.  However, there will be a need for underwriting and documentation and things may not move as fast as you would like, so be prepared to get a little frustrated in dealing with the “paperwork”.  On the next page there are several loan programs to check out:

1. 1. Economic Injury Disaster Loans (EIDL) from the Small Business Administration
      The SBA can provide up to $2 million to help meet financial obligations and operating expenses. The loan amount will be based on your actual economic injury and your company’s financial needs. This is why the COVID-19 spreadsheet is important to complete. The interest rate on EIDLs will not exceed 4 percent per year. The term of these loans will not exceed 30 years.
      You can apply online for an SBA disaster assistance loan. For more info, click HERE.
   2. Small Business Interruption Loans from the Federal Government

As of March 20^th, the Department of the Treasury and the US Congress are developing a $300 million loan program for small businesses (those with fewer than 500 employees).  The loans would be fully guaranteed by the Federal government and available through local lenders and offer streamlined underwriting and approval. The focus of the loans would be to help cover payroll costs.  Please note that regulations and terms are still being hammered out and hopefully funds will be available by the end of the month.

The State of Maryland Department of Commerce and the Anne Arundel County Economic Development Corporation may be offering programs. Continue to monitor their web sites and look for other information from the Chamber about any new offerings