The current COVID-19 pandemic is creating the broadest environment for financial distress that we have seen in a decade. Managing through the crisis, weathering the storm, and planning for a variety of potential outcomes should be paramount. At a time like this, management teams need to deal with immediate challenges like liquidity while still keeping an eye on the big picture. Evaluating and managing the liquidity of your organization is step one in surviving the crisis.

Leadership undoubtedly has a high level view of cash flow, but it is time to scrutinize cash resources on a granular level as well as immediate availability of funds to determine if your organization needs to take more significant cash preservation steps. Building a 13-week cash flow forecast is a good starting point. Applying the discipline of reviewing all of your sources of cash and cash disbursements at a very detailed level can be an enlightening process. In addition to highlighting areas of liquidity management where control is needed, the process is likely to identify areas where additional changes to customary liquidity management practices may help your organization navigate a disruptive and difficult financial period.

Broadly speaking, liquidity management refers to a set of ongoing strategies and processes that ensure your organization can access cash as needed. The practice helps you answer two important questions:

• How much liquidity is available to you; and
• How long can you operate without that liquidity under various operating assumptions.

The answers to those two questions provide a guide to your overall strategy during times of disruption. When leadership is not comfortable with the responses to those two points, it can start making some additional changes. Here’s a detailed look at how liquidity management evaluations in the COVID-19 pandemic can work.

How Much Liquidity Is Available to You?

The answer to the first question is important and should start with evaluating where your cash is and the certainty of access to it. It is important to consider the implications of cash management agreements and any rights of setoff lenders may have under credit agreements. These agreements may limit your ability to access all of your cash. It makes sense to review your documents and agreements and have conversations with your banks and lenders to determine what steps can be taken now to ensure complete and continuing access to your cash.

Another important step involves applying for emergency reserves or access to COVID-19 stimulus funding created by the Coronavirus Relief, Stimulus, and Economic Security (CARES) Act. If you qualify as a small business (generally have 500 or fewer employees), Small Business Administration (SBA) loan enhancements might provide for short-term financing options that can help improve your liquidity. Larger companies may benefit from enhancements to the U.S. Department of Treasury’s Main Street Lending program.

Lengthen the Cash Runway

Aside from access emergency relief, there are ways that organizations can free up additional cash reserves, or “lengthen” cash runways. Accessing federal relief programs takes time, and there is no certainty that funds will be available (initial federal funding for SBA loans ran out on April 15), so employing self-help right now may be just as important.  

Customers and Cash Collections

Set up a committee to review agings and resolve issues with accounts receivable. This committee should meet regularly and identify low-hanging opportunities. Resolve any billing errors or documentation issues as your staff accelerates the traditional billing process.

Evaluate whether giving incentives to customers to pay earlier makes sense in order to secure payments quickly. The goal will be to get cash in the door as soon as possible. Providing some flexibility on payment terms may be painful in the short-term but builds durable bonds with customers. Being helpful and supportive with your customers is a reflection of your organization’s values and in the longer term will enhance the value of your franchise

Supply Chain, Vendors and Payments

Delaying payments is completely in your control. Many utilities companies and lenders are offering temporarily relief or extended payment windows during the pandemic response to ease the COVID-19 burden that many organizations are experiencing. Your organization may want to take advantage of these opportunities. Another effective strategy is to organize a small committee to review all processed payments on a weekly or more frequent basis. Triage and prioritize payments that are critical and identify any unnecessary spending. Evaluate all capital expenditures for necessity and cancel anything that is not going to immediately produce revenue and cash flow. 

It is important to put spending rules in place and to tighten up the authority for disbursements. The momentum of a corporation can be difficult to slow down if left unchecked. Be ready to answer questions from vendors. Have a script prepared to for these discussions that has a clear message and request for support. Continuing to work with you is likely in the best interest of the vendor and even slow or delayed payments will be critical to them.

It is critical to find ways to operate through the crisis. Supply chain disruptions are likely to happen.  Consider various practices to get the goods and services you need. Understanding which of your suppliers are most prone to disruption can assist you in mitigating their impact on your operations. If a vendor is critical to your supply chain, consider ways you can collaborate with them to ensure that they remain able to serve your needs. This may come down to sharing resources with them if you have the capacity. Working with your critical suppliers is also another way to reaffirm your organization’s core values and commitment to business partners while enhancing the longer term value of your organization. 

Alternative Cash Generation

Evaluate any other means for generating cash. Assess whether there is excess supplies or inventory to sell or excess equipment including all non-essential or unproductive assets or equipment. As an alternative to sale, consider sharing excess supplies or inventory with vendors to support their needs and maintain the health of your supply chain. Sales of assets during the crisis are likely to be challenging and take time. From a value standpoint, the market is likely to be depressed. However, given the uncertainty surrounding the crisis you should be playing the long game here. Beginning the sales process now with the expectation that these efforts will generate cash down the road when your need for liquidity may be more urgent is a prudent decision.

Consider asking your landlord for some assistance during the crisis. A rent holiday or reduced rent for a period of time will more than likely free up substantial liquidity. Adding any rent relief to the end of your lease may help the landlord make this work. This process can take time, especially if the landlord is required to obtain waivers from its lenders for any rent relief it grants to tenants.

Personnel Decisions

Unfortunately, every business will likely have to make very painful decisions regarding employees. This is usually where there is the biggest opportunity to cut costs and preserve liquidity. To mitigate some of the pain, consider various options that are less permanent than layoffs first. Look at salary cuts across the board for management as well as your staff. See if there is a way to share the burden before layoffs become necessary. There may be state rules that need to be considered before wage cuts can be made, so bear that in mind. When conditions normalize, it might be more cost-effective to retain as much of your workforce as possible.

Furloughing employees might make more sense, particularly if you are looking to take advantage of federal stimulus programs with payroll implications, such as the payroll tax credits or the SBA’s Paycheck Protection Program. Be careful because there may be notice and waiting periods to furlough employees required in some states.

If layoffs are the option that makes the most sense, be sure to fully develop estimates of the near-term cash implications for severance and benefits by contract or state rule. Also, evaluate whether the Worker Adjustment and Retraining Notification act (WARN) will apply. WARN requires employers to provide up to 60 days advance notice of a significant reduction in force, which can lengthen the time required to execute the plan.

Crisis Management

There is no question this is a crisis, and every management team should be in crisis management mode.  Your management team needs to be focused on critical business processes, employee issues, planning and the future. Setting up a war room and small teams organized around functions (HR, IT, legal, public relations, etc.) to deal with issues can be very effective. Appointing a point person to coordinate all of the teams and facilitate communication is important.

Decentralizing authority over these functions allows for quicker responses to rapidly changing information. It also allows people closest to the issues to set priorities, adapt to changing circumstances and act appropriately where needed. While reporting lines to the top of the organization need to be established to allow for effective coordination among teams, it is important to reduce impediments to getting things done. Adherence to established internal processes should be minimized in favor acting nimbly to the environment.

Part of the exercise of the war room and bringing senior leadership into crisis management is to plan for all exigencies and lay the groundwork for a successful return to more normal operations. This will feed into other areas such as capital planning and dealing with stakeholders. It will also allow management to test various scenarios and sensitize plans to have a clearer view of a range of potential outcomes. The speed at which things are changing renders detailed planning less relevant than considering many potential possibilities.  Remember the first objective is survival so test your strategies and their impact on short-term liquidity and viability. The second part is protecting your organization and value, so understand how various plans will also impact the business after the crisis abates.

Your stakeholders and business partners have an interest in your success. Reach out to lenders, sponsors, property owners, and vendors to let them know you have a plan to navigate these uncertain times. Script out your discussion and practice the discussion to get the message correct.

Create Contingency Plans

Having a plan for a worst case scenario makes good sense. There is so much uncertainty around the duration of the crisis and the speed at which recovery will happen. There may come a point in time where the business or parts of it are no longer viable or where lenders lose patience or where existing contracts become too burdensome to meet. While solutions to these problems can often be achieved consensually, there may be times when the only solution is a formal proceeding under the protection of the courts in Chapter 11.

Contemplating a Chapter 11 filing is painful, but it may provide the greatest opportunity to survive.  Consider the business owner with personal guarantees: it may be much more favorable and affective to file for Chapter 11 and negotiate with creditors and lenders under the protection of the bankruptcy court than to see the business fail and liquidate and have creditors pursue those guarantees.

A formal Chapter 11 filing takes time and planning. It is better to have liquidity going into a filing, and so having an alternative plan and timeline for when that plan needs to be acted upon is critical. An unplanned filing without liquidity or lender support for providing that liquidity is less likely to be successful. 

We Are In This Together

Our team is here to help you understand your options and even assist in preparing strategies in dire financial situations. Please feel free to leverage the knowledge of our professionals. Even though the COVID-19 crisis has presented the economy with unpresented obstacles, our understanding of industry needs and financial strategies has prepared us to help your organization stay adaptable to the rapidly changing times. Keep in mind that while your organization may be struggling, many others are facing similar stresses and having to have difficult conversations. While the road ahead may be unclear, there are certainly ways to maneuver operations and adjust expectations to navigate in uncertain times.

COVID-19 developments continue to emerge. To stay up-to-date on the latest news, please visit our COVID-19 Resource Center.

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