Give Your Company a Twofer to Combat COVID

Author: Larry Chester, President

Two reports are critical to planning how your business is going to operate in the coming weeks and months.

1. Cash Flow Forecast
2. Budget

A cash flow forecast tells you how much money you’re going to need to operate your company over the next period of time – typically 13 weeks.  The further out you can plan, the more time you have to make adjustments to the way you’re operating, allowing you to correct, or cut back before you run out of money.

A budget isn’t just a guess about how your next year is going to end.  It’s a plan for how you’re going to get to the end of next year.  It provides a basis for your working activities and what resources you’re going to need to get there.

The best way to use these tools to guide your business forward in this difficult economy is to develop each one of them with two different scenarios:

1. Return to normal
2. Continuation of the nightmare

You might not like it, but there’s a chance that the economic effects of the pandemic could last through next year.  If that’s the case, then you need to be prepared.  You should develop two alternative scenarios.  Since the cash you generate is going to depend on sales, develop your monthly budget first, and then use those numbers to develop your cash flow forecast.

Budget

Return to Normal

• Revenue – Use your monthly sales from 2019 as a starting point. Adjust those sales numbers for any changes in your primary customers, and any major changes in your product lines.  Create a positive but not overly aggressive forecast.
• Cost of Goods – Update your COGS based on current prices. Tariffs might have been imposed on imported products.  Raw materials or assembled components might have been impacted.
• Operating Expenses –
  • Marketing and Sales – Be conservative, but promote your services. Reach out for new opportunities.  Keep costs under control. Be honest about trade groups and memberships and whether they contribute to your top line.
  • Overhead – Consider increases that are unavoidable for cell phone, electricity, gas, rent, insurance.
  • Payroll – If you’re back to “normal,” plan for the staff you’re going to need to cover the upcoming work. Expect that everyone will need to be more efficient.  The reward for the extra hard work is continued employment – really.

Continuation of the Nightmare

• Revenue – Evaluate every customer to determine what their purchases will be for the next year. There may be new opportunities, but they may be minimal.  Take your sales for the past 6 months and project them for the next year.  Think realistically if it might get even worse.  Remember, this is your worst-case scenario.
• Cost of Goods – Do your calculation based on the revised sales numbers above. Determine if your costs have increased.  Also consider if you have any leverage to negotiate with your suppliers.  They are facing difficulties as well.  Be aggressive but realistic.
• Overhead
  • Marketing and Sales – Don’t disappear. Studies have shown that marketing during difficult times is important to any rebound plan.  But reduce your expenditures where they won’t directly impact on sales.
  • Overhead – Negotiate with your landlord for a rent reduction or at the very least, a rent deferral till this is “over.” Reduce the amount of space you’re using.  Turn down the thermostat and turn off unneeded lights.  Talk to your insurance agent.  Decrease limits where you can, and raise your deductibles.  That will reduce your premiums.  Adjust your coverages based on reduced sales numbers.
  • Payroll – Make the difficult decisions. Determine the staff that you really need.  Employees need to take on extra responsibilities.  At this point you’re looking at survival.  It’s not pretty, but it might be necessary.

Cash Flow Forecast

Return to Normal

• Cash Collections – Plan the first 13 weeks of the new year using your sales forecast. Consider cash collections just a bit beyond normal terms.
• Accounts Payable – Plan on stretching out your AP to 2 weeks after due date. Make use of your cash.  Nobody is going to complain.
• Payroll – if you’re not already doing it, use an outside service, and also use direct deposit instead of writing out checks. Simpler for everyone.
• Banking relationship – Recognize that your bank is going to be nervous about your status. Keep them informed about your plans.

Continuation of the Nightmare

• Cash Collections – Just as you’re pushing off your payables, expect that your customers will as well. Consider getting deposits from some clients.  It’s important that you protect your cash position.  They might not like it, but it will provide additional safety for you.  Plan that everyone will be 4 weeks late in paying your invoices.  Be much more aggressive in collections.
• Accounts Payable – Stretch out your payments. Push everyone out an additional 2 – 4 weeks beyond their normal terms.  Pay large invoices over a period of weeks.  Regular payments will provide comfort to the supplier and will stretch your cash.
• Payroll – You’ve already cut staff. Ask remaining staff to take a salary reduction for the next six months.  Be equitable.  You need to take that cut as well.  There are no secrets here.  Everyone will know what you’re offering everyone else.
• Banking relationship – Banks are being careful. Develop a plan.  Prepare a conservative budget and cash forecast.  Show it to the bank.  Tell them how much additional money you’re going to need.  They may not give it to you, but knowing your plan will make it easier for them to consider it.  Open conversation is always important.

These are difficult times for every business.  Either your business has suffered, or you’re afraid that you’re going to have issues in the near future.  Planning is the best way of preparing for whatever the future might hold.  In a very uncertain environment, planning for different scenarios will provide you with alternative strategies that you can use to change direction quickly.  It will also help you sleep a little better at night.