By Eric Hall
CFOs are unlike other employees. Most of us toil in the background while sales, marketing, and products get more attention. Crises, however, really get a CFO’s blood pumping. We’re suddenly in the spotlight being called on to raise or conserve cash, slash expenses, and keep the company solvent. Our knowledge about every facet of the company provide us with insights that few others have. We know all the levers to pull to optimize performance under new circumstances and how to best keep the company operating profitably.
Having managed and led teams through multiple financial, economic, and other crises during my career, you learn some actions that work regardless of the specific bad situation. Some of these may even seem counter intuitive, but what matters is – they work.
Cash Is King (or Queen)!
An experienced CFO knows that companies should always be conserving cash, even in good times. This simple mantra becomes crucial in a crisis. You should prepare a 13-week rolling cash forecast if you’re not already doing this. This is a simple cash receipts and disbursements report that lays out the weekly cash inflows (from customers, bank debt, and other sources) and outflows (to employees, vendors, and other obligations). You need to know what your net cash usage is so you can better manage the timing of your receipts and disbursements. This forecast should be updated weekly, dropping off the oldest week and adding the next one. Do these on Friday afternoons and send it to your CEO and key team members that day.
Revise Budgets and Run Scenarios
Immediately update your annual budget and long-range plans and perform multiple sensitivity analyses, varying sales, expenses, and capital acquisition (spending and funding). Now is also the time to eliminate truly unnecessary expenses. Keep the “need to haves” and get rid of the “nice to haves.” Be sure you estimate your loan covenant coverage under each scenario. Run upside and downside estimates.
You should share your updated budget and contingency plans with your board, investors, and banks. They will need it for their analyses of your situation and to determine what support they can provide you. More, and early, communication is always better than less during a crisis. They all want to know what you will be doing to keep your company afloat.
Strategically Leverage Credit
Draw down as much as you can on any credit facilities you have available. Remember, you may need to leave some room for covenant compliance. And regarding covenant compliance, this is the right time to ask your banks for covenant relief after you draw down on your lines of credit. A higher outstanding loan balance is leverage for you. No banker wants a default. The revised budget and forecast and the actions you’re taking to conserve cash will give them confidence that you’re worthy of relaxed covenants. More importantly, show them that you can meet interest and principal payments. Your ability to continue to service debt is what matters here.
Most banks will kick your loan into their workout group if you suspend principal repayments regardless of the reason, but now is the time to ask them if they would be willing to suspend principal repayments (if they can). Make sure, however, that you avoid being placed into the “problem loan” category. Banks can give covenant relief for quick/current ratios, debt coverage, and minimum revenue and EBITDA growth. Be sure to remind your bankers that the Treasury has eased their covenants and you expect your bank to do the same for you.
Avoid Layoffs If Possible
Resist the urge to lay off employees to cut expenses! You will need these employees when your business turns around after the crisis. Layoffs do not provide the big injection of cash you think they will. Severance, payment of vacation or paid time off (PTO), and payments of benefits will actually create a large, upfront cash outflow under most layoff scenarios. It will often take 3-6 months before you see the benefits of a layoff in your cash forecasts.
There are many things you can do besides laying off employees:
- Executives should lead by example and reduce their salaries by 10%, 20%, or more, if they can afford it. How can you as a leader in good conscience ask employees to take a cut in pay if you won’t?
- Next, reduce employees’ pay. You will need to have them sign an agreement before you do this that spells out the amount of the reduction, if or when any reduction gets paid back and under what conditions, and if any non-cash compensation will be provided. Now is a good time to grant employees additional stock options or restricted shares in return for their agreeing to lower pay for the duration of the crisis. I’ve used this tool in the past with good results. Be sure your employment law counsel prepares the necessary agreements.
- Encourage your employees take vacation or PTO. It will reduce the company’s accrued liability and future risk.
- You can also reduce the hours each employee works per week. Just be careful that you don’t impact their benefits.
- Furloughs are the last thing you do before laying off employees. Again, consult with your employment law counsel before doing this. You will find that your employment law counsel will be one of your best friends during a crisis.
- If you’re having to do a large layoff, consult counsel about applicability of WARN Act provisions.
- Finally, be sure to look into the government programs being offered under the CARES Act. There is support for small businesses to obtain loans for payroll and rent support. A portion or all of these loans may be forgiven if you meet the government’s terms and conditions.
Manage the Timing of Accounts Receivable Collections
Resist the urge to collect customer payments faster! Your customers are experiencing the same thing you are during a crisis. They’re trying to conserve cash, too. Putting pressure on them will create ill will and could lose you a customer when the crisis is over. Work with your customers and vendors to extend receipts to Net45 or Net60 day terms. Let them know that you’re in this together with them. The goal is to sync receipts and disbursements and make cash flows more predictable. Predictability leads to better cash management. Be sure to let them know that terms go back to their original values once the crisis is over. Use this as an opportunity to strengthen your relationships with your customers and vendors. It’s all about communication.
Use This as an Opportunity to Invest in Your Company’s Future
If you have the ability, invest in your business. Client communications and market research, development of new products, evaluation of potential new markets, and M&A research are all good places to invest time and resources. Remember, your competition is probably pulling back. It will take them longer to ramp up their business once the crisis is over. If you have proactively invested time in these areas, however, your company will be able to move much more quickly once the economy bounces back. FLG Partners invested in marketing and social media during the Great Recession of 2008-2009. We were able to weather the recession and outpaced our competition once the recession was over. During time like these the strong usually emerge stronger and take market share from the weak.
“Stay Calm and Carry On”
Finally, “stay calm and carry on.” Bring in outside help where you need it. Our experienced financial team at FLG Partners is available to help you survive the COVID-19 crisis and aftermath. Our clients tell us that we always deliver tangible value, immediately. We stand ready to help you with your cash flow management, fundraising and financings, credit management or any other strategic, financial management requirements. Make sure that your team prioritizes the right actions now to conserve cash and position your company for recovery downstream. Together, we will get through the coronavirus crisis.