The realities presented by the COVID-19 health crisis have businesses, particularly small businesses, focused on survival. According to Clayton & McKervey shareholder Julie Killian, CPA, who is also an appointed member of the AICPA’s Private Companies Practice Section (PCPS) technical issues committee, the most important survival step to take after ensuring the safety of the team is to protect the company’s cash position to the degree that’s possible.

“The first order of business is to do whatever you can to cut costs and maintain liquidity,” Killian said. “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 now.  Talk to your lenders as soon as possible to discuss your plans and the availability of loan relief options if needed.”

Killian says the goal is to “survive today in order to thrive tomorrow” and offers tools for the battle, notably:

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 preference and the complexity of the business; some templates can be found in a quick Google search to jump start the effort.
• The spreadsheet contains 13 columns representing the next 13 weeks. The rows are dependent on the relevant cash-in and cash-out categories for the 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 highlight critical management decisions that must be made in order to protect your cash flow position and provide for survival.

Critical Management Decisions to Manage Cash Flow

Killian offers actions businesses can take to manage cash flow utilizing the 13-week analysis:

• 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 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 payments rather than extend 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

The Federal government, through the Small Business Administration (SBA), has programs available to assist businesses during a crisis.  The SBA is currently providing disaster relief funds for a variety of disasters including COVID-19.  Making use of the available programs can help increase cash inflows and may temporarily or permanently decrease cash outflows.

Bank Loan Modifications

The banking regulators have indicated that they intend to ease restrictions that borrowers might normally face when seeking 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 trigger a set of financial accounting and reporting rules in order to properly reflect the substance of the TDR. 

According to the March 22 joint statement, 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.  Killian, however offers a caveat.

“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 businesses reach out to their financial institution before they fall out of good standing,” Killian said.  

About Clayton & McKervey

Clayton & McKervey is a full-service CPA firm helping middle-market entrepreneurial companies compete in the global marketplace.  The firm is headquartered in metro Detroit and services clients throughout the world.  To learn more, visit claytonmckervey.com.