COVID-19 Resources

Leading a Business Through a Crisis: A Deep Dive into Managing Working Capital

Written by Hanny Akl CPA, CFE, CEPA, CVGA and Roger Spain, CPA, CFA on April 21, 2020

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As businesses face new challenges as a result of the COVID-19 pandemic, many are searching for ways to increase margins and contain costs to free up working capital.

While each business is different and will have different problems and solutions, there are a few things to consider if your company is looking to maximize liquidity in these trying times. Here, we’ve included a few questions that businesses may be asking about working capital and cost containment, as well as the answers that can offer guidance for difficult decisions in this season.

What metrics should businesses consider when evaluating working capital needs?

Each business is different, but knowing your business’s financial status, how much cash you have and how much cash you need will be the foundation of the decisions that you make, but it’s a little more complicated than simply looking at your bank balance.

Be sure to understand your business’s cash conversion cycle and begin tracking your cash balances on a daily basis so that you always have an up-to-date understanding of the cash that’s available to your business. Continue to monitor key performance indicators for your business (if you don’t have any, now is a great time to identify them!), measure benchmarks, monitor liquidity ratios and track your actual results against budget.

Once you’ve gained a thorough understanding of your business’s financial situation, run several cash flow models, and choose the one that’s most realistic, keeping in mind that a conservative plan is always best. Consider what worst-case scenario may be and build in if-then scenarios measuring the impact on your cash flow.  The old saying, plan for the worst and hope for the best applies here!

Learn more in Warren Averett’s special edition podcast episode, Business Advice Amid COVID-19: Working Capital.

When creating my working capital plan, what potential pitfalls should I keep in mind?

Here are a few questions to ask yourself as you’re creating your working capital plan:

  • Are you being realistic in making your plans and projections?
  • What will happen if you lose a key customer or vendor? If customers want to cancel their relationships with you, are you prepared to offer incentives for them to stay with you, like discounts, concessions or payment deferrals?
  • What if a key employee leaves? How will that impact your cash flow needs?
  • How do you make payroll?
  • Are you in line with the covenants that come with your lending arrangements?
  • Are your accounting processes up to date?

What time period should my business plan for to have sufficient working capital?

Initially, think in terms of 13 and 26 weeks. You must ensure you have sufficient working capital for at least 12-24 months.

Is it possible to have too much working capital or liquidity right now?

As important as liquidity is, it is possible to have too much working capital, which can lead to waste and inefficiency. For example, how are you managing your inventory? Do you have too much on hand, or do you have outdated items?  When is the last time you inventoried your stock?

What can my business do now to maximize liquidity and identify additional working capital?

A few things that your business can do to maximize liquidity are:

  • Consider drawing from your lines of credit; if you don’t have a line of credit, consider applying for one. Try to extend the payment terms on it. Consider how you will be impacted if the bank terminates your lines of credit in the future.
  • Consider applying for relief through the Small Business Administration Loan Program (if you qualify).
  • Connect with your lender for other options, as well as renegotiate current financing arrangements – longer amortization periods, debt service holidays – and do not forget to ask for debt covenant waivers.
  • Consider selling a portion of your business or finding mezzanine lenders to assist.
  • Try to accelerate accounts receivable collections as much as you can. Be reasonable and understand your customers may be in similar situations.
  • Reassess invoicing processes to eliminate inefficiencies that may be causing delays in sending invoices.
  • Reassess contracts and credit terms with your customers. Are you giving them too big of a credit window to pay?
  • Implement more rigorous credit checks to reduce bad debts.
  • Maintain customer and supplier relationships. You will need the good relationships when it is time to navigate out of the current turmoil. Working with key customers and suppliers on payment terms and keeping some level of activity with them may help when it is time to emerge from the depths of the trouble. Plus, having good relationships with vendors might lead to larger discounts for bulk buying.
  • Try to match payment term accommodations on both the sales and supply sides of the business.

What should I communicate to my company’s stakeholders?

It is imperative that you communicate heavily and clearly to all stakeholders, including your customers, your vendors, your lenders and your employees, so that they are informed of your company’s plans.

When talking to vendors and customers, ask about their plans as well. It’s okay to ask how they are reacting to this situation and what they will want from you in this season. Assure them that you will be around for the long term and the partnership will be needed.

When talking to employees, instill a sense of calm and confidence. They need to know their paychecks are safe, and they also need some direction on what to focus on. Call your employees and ask them about their day rather than about their specific professional responsibilities.  Your culture cannot be forgotten during difficult times.

What are some things my business can do quickly and immediately to help make payroll?

  • Remember that money is fungible and stay focused on saving where you can and generating as much cash as possible. If you save money in one area, you can use it in another (payroll).
  • Forecast lost customers.
  • Forecast extremely slow sales and even slower collections.
  • Consider any cost containment measures that will have immediate impact, as well as a reasonable timeline for others to take effect.
  • Consider the difference between temporary expense reductions and permanent expense reductions. Ensure that your cash flow model incorporates these accurately.

What can my business do to mitigate labor costs?

Labor is likely to be a business’s largest expense, and it’s also one of the most difficult areas to navigate when considering cutting costs. There is no easy or one-size-fits-all solution to reducing labor costs in your business, but here are a few things to consider.

  • There are options available to businesses under the recently-passed CARES Act that are designed to help provide financial relief to employers and to keep individuals employed. Businesses that qualify can apply for assistance.
  • If you must further reduce labor costs for your business, consider instituting a freeze on hiring and pay increases while also delaying discretionary bonuses.
  • If your business must cut wages for your employees or institute layoffs, it’s best to be transparent and honest with your team and consider making one deep cut instead of a series of smaller ones.
  • Consider reducing your workforce by eliminating duplicate positions or underperformers. Removing underperformers may actually improve morale.
  • Implement pay cuts starting with upper management and work your way to lower levels. Make sure to communicate that everyone will pitch in, and as soon as the business picks up, you will reinstate regular wage rates.
  • Consider providing equity or profits interest, where appropriate, in lieu of monetary compensation.
  • Stop 401(k) matching.

Where else could my business cut down on costs in general?

Evaluate your business’ profit and loss statement, and consider which costs are fixed and which are variable in the current situation, keeping in mind that many fixed costs are truly variable when in financial distress. Ultimately, run every cost through the following filter: does this expense directly contribute to the bottom line?

Here are a few places in which your business may want to consider cutting costs:

  • You may want to reduce your spending on sales and marketing, or at least pivot to techniques that may be less expensive. With fewer active buyers and decreased demand, this may be a viable cost-saving measure for your business.
  • While much travel has been reduced by government mandates, it’s still important to consider you company’s travel and entertainment expenses (currently and into the future) as potential areas of savings.
  • There may be areas to consider cutting employee benefits, such as allowances for vehicles and cell phones. Many employees are relying on their companies to provide medical insurance, so while you’ll want to avoid cutting those benefits, you may want to evaluate other options that may be less expensive for your business.
  • Evaluate any future projects, such as optional technology upgrades, construction or renovation that may be able to be postponed to free up needed funds.
  • Connect with your vendors to renegotiate your long-term contracts with stakeholders in your business, including rent with your landlord.
  • If you have a remote workforce, consider reducing office expenses, such as phone and internet, cleaning services, etc.
  • Work with your bank to get your suppliers set up on an accounts payable card program.  This eliminates check processing, suppliers get paid more quickly, and you get a revenue share from the bank with no cost to you.
  • Implement an approval process to review spending requests in order to identify and circumvent any unnecessary purchases.

Learn more in Warren Averett’s special edition podcast episode, Business Advice Amid COVID-19: Cost Containment.

How can my business slow its cash burn rate?

The first step toward improving your business’s cash burn rate is to first know what your current cash burn rate is. It’s important to dig into your unit economics (know your profit margins by division, service or product categories), know your supply chain economics and identify how your key performance indicators line up with those of others in your industry.

From there, you may be able to do the following to slow it down:

  • Add measures to control your costs and cash outflows.
  • Implement an approval process, if you don’t already have one, so that all expenses must be approved by certain key managers.
  • Reduce the threshold that key managers can approve independently.

When it comes to supplies and inventory, should my business increase buying to take advantage of low prices from vendors?

If your business is looking to cut costs and remain solvent, it’s best to avoid adding new expenses wherever possible. Don’t make purchases that you wouldn’t have made otherwise just because prices are low.

However, if your business has sufficient data and favorable projected return on investment behind a project that will increase revenue, you may want to continue to pursue it. For example, online platforms and e-commerce tools may be reasonable investments in order to provide new revenue streams, depending on your situation.

How should my business think about new revenue?

Your business may lose revenue in this season, so it’s important to get creative and think outside of the box when it comes to supplementing revenue sources. Consider:

  • Selling more of your existing product to your current client base;
  • Selling different types of products to same client base; and
  • Expanding your market.

Connect with an Advisor

No two businesses are alike, and each organization will have different needs with varying solutions in this season. For information about what’s best for your specific company, please reach out to your Warren Averett advisor or have a member of our team reach out to you.

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This article reflects our views at the time this article was written and should be used as reference only. We recommend that you talk to your Warren Averett advisor, or another business advisor, for the most current information or for guidance specific to your organization.

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