- Recording: Managing Liquidity
Join our multipart livestream series to engage in the latest changes related to these uncertain times. You’ll hear strategies for navigating what these developments mean for you. Topics include issues related to legislation, liquidity, workforce, and other relevant topics.
In case you missed it:
Boyd is a principal in CLA's Manufacturing industry group and has more than ten years of experience in public accounting, specializing in tax services for multi-state and multinational C-Corporations, S-corporations, partnerships, and tax structuring of M&A transactions. Arends is the Managing Principal of CLA’s Private Equity Practice and has been with the firm since 2008. He has more than 30 years of experience serving private equity groups, portfolio companies, and companies raising debt and equity. He specializes in financial quality of earnings due diligence projects primarily in the technology, life sciences, and manufacturing and distribution industries.
What we talked about:
Boyd: Welcome back to our livestream series. Again, our first priority is your health and the wellness of you and your families, and all of us in the CLA family want you to know we are thinking of you as our first priority. We have a lot to cover in today’s 30 minutes. Thank you for all your questions; please keep reaching out to us! We have provided links in the description box to make it easier to reach us. Today we will:
- Provide critical updates from the last two days
- Have Jen Rohen answer some of the top questions that flooded in since Tuesday
- Dive into our main topic!
Notes on a couple developments:
- The Department of Labor issued some FAQs yesterday on their website to clarify key points for employers and employees.
- Right before midnight last night, the Senate passed the phase III stimulus legislation, which includes loans, tax breaks, and direct payments for major corporations and individual taxpayers to help the U.S. economy. The bill now moves to the House for vote and is anticipated to be voted on by Friday. We are still analyzing the fine details of the bill – it’s a mere 880 pages. However, we know many of you are awaiting how the provisions impact your organization. Our next session Tuesday will unpack key points of the bill. Given the magnitude of the legislation, that session will be expanded from 30 minutes to 1 hour.
First, we brought Jen Rohen back to answer a few of the top questions from Tuesday.
Rohen: Thanks so much, Leslie, and thanks for the questions everyone. Many of your questions are not going to have clear answers because we are waiting for the formal regulations to be issued by the Department of Treasury and Department of Labor. That said, there are a few key points we can clarify.
Boyd: That’s right. The first question we’re hearing a lot is: how will this work for employers with 50 or fewer employers?
Rohen: There is so much in the news about this, but the reality is the information will come in the regulations. What we know now is the Act provides for an exception for businesses with 50 or fewer employees if providing the child-care and sick leave payments would jeopardize the viability of the business as a going concern. The regulations will address how to make this election and what documentation the small businesses will be required to provide in order to prove they qualify.
Boyd: Another big question relates to our tax-exempt entities and how the law will apply. Can you address that?
Rohen: Public sector employers of fewer than 500 employees are going to be held to the same requirements as the private sector to allow for leave under the conditions we outlined on Tuesday — related to — child care for school closures in a public emergency and paid sick leave related to testing positive or being quarantined/isolated under doctor’s orders or while seeking diagnosis for COVID-19. Nonprofits will be able to apply the tax credits to their payroll taxes. The mechanics will be outlined in the regulations.
Boyd: Thanks, Jen- this provides a lot of clarity – I know there are many questions from our audience, and we will continue to provide updates on this and the Senate CARES Act in livestreams to come. I encourage our audience to continue to send those questions to your CLA advisor or to firstname.lastname@example.org . You may also contact us by visiting CLAconnect.com.
Outside of our questions on the Family First Response Act, managing liquidity and cash has been one of the most discussed topics. And in these uncertain times, the cash and liquidity needs of an organization are paramount and should be a focus in in any organization.
Craig Arends, the leader of our Private Equity Practice at CLA, will be focusing on the five ways to position your organization to maximize CF and liquidity.
Work on these five areas now to position your organization for what’s coming next is vital.
- Understanding your cash and working capital needs
- Understanding your costs – costs you can and can’t control
- Evaluate your customers/funders and suppliers/vendors
- Communicate early and often with your lenders/stakeholders
- Identify emergency funding resources
Arden: Cash is king - Cash is the lifeblood of any organization. In volatile and uncertain times, getting an immediate handle on your daily cash needs is essential. Take a critical view of operations, review existing cash flow forecasting processes, and understand how potential disruptions to operations may affect liquidity.
Boyd: Cash is definitely king in these situations and provides a lot of flexibility to make decisions. Can you give us some more detailed examples of what teams can do to get a picture of cash flow needs for the organization?
Arends: Run scenario analyses on your financial and cash forecast and understand how that interacts with short-term liquidity needs.
- When I speak of scenario planning, I am not suggesting an organization go out and get a feasibility study, business valuation, or a 5-year financial projection or discounted cash flows that can take weeks and lots of money to complete. I am talking about an approach similar to what we have developed at CLA called CLA Intuition 2.0. I know most of you probably did not realize CLA even had a tool called CLA Intuition, but years ago it was a Capital Planning tool we developed. We have now developed CLA Intuition 2.0 applicable for any industry, being offered to organizations for $1,000 as a quick (completed in less than 24 hours) and effective tool to get actionable financial intelligence in uncertain times. It provides a structured approach to assess the possible revenue, expense, and cash flow impacts of COVID-19 over a 90 day to 12-month time period. We believe organizations will see a bottom, a surge, and then a normalization or equalization.
- As Yogi Berra said “If you don’t know where you are going, you’ll end up someplace else”
- Look for opportunities to build a war chest of cash
- Investigate whether drawing down on a line of credit or borrowing money from a bank, even if you have never done it before, could be prudent for safeguarding your organization.
- Strategically manage working capital
- Look at options on payroll/workforce – across the board reductions, layoffs, furloughs.
- Potentially selling inventory or minimizing new inventory purchases to generate cash.
- Take a critical look at such things as day’s payable outstanding and days sales outstanding and understand impact of stretching these days in either direction.
- Assess capital expenditure and property expenditure requirements and defer non-essential spending if possible.
Boyd: Craig, we just had a discussion yesterday focusing on supply chain. We talked a lot about having “just in case” inventory versus “just in time” due to the significant risk of disruption in supply chain right now. This impacts cash flow negatively. Any advice for our audience on this? Are there other things that could be considered with managing supply chain?
Arends: Many of our clients are privately held – therefore the financial health of the owners are just as critical as the business. At this point in time it is essential to understand ownerships ability and willingness to invest back in the business. While this is usually our last recommendation – being prepared and understanding the flexibility of ownership is important. It can also help in conversations with lenders. If you are not privately held, you need to communicate with donors, funders, parishioners, etc. to seek ways they can be part of the solution.
Be relentless on cost control to be fiscally responsible to your stakeholders in an environment where supply and demand fundamentals are decreasing simultaneously can be difficult without a close analysis of spending.
- Develop a strategy: do not execute cost-cutting initiatives at the risk of compromising your ability to achieve your mission, revenue generating capabilities or diminishing value.
- Review fixed and variable costs carefully and determine what costs you actually need to run the organization.
- Develop and monitor cost reduction initiatives, such as rationalizing administrative costs, taking a close look at headcount and instituting policies that encourage and reward cost savings and conservation.
Boyd: Contingency planning is incredibly important. I know every business is different Craig – but what is some low hanging fruit you see as an opportunity to manage right now? What types of expenses should be cut and what should be one of the first things that is “managed?” Who should be included in these conversations from a leadership perspective? There needs to be buy in across the organization – what are your recommendations for this?
Arends: This is where it gets real and organizations need to be strategic. Things to consider in a contingency plan, would include the following and those involved should be the leaders of the organizations.
- Reduction or delays in spending – nonessential
- Hiring delays
- Reduce or eliminate discretionary benefits
- Across the board compensation reductions
- Workforce reductions
- Capital spending
- Working capital considerations
Evaluate customers/funders and suppliers/vendors In times of economic uncertainty, organizations could see increased pressure on the purchasing power and credit-worthiness of customers/funders while also facing tighter credit terms and product availability from suppliers/vendors. For organizations counting on funders, not receiving the funding you are relying on can impact your ability to meet your mission objectives.
- Do not assume your customers/funders are financially healthy. Re-evaluate credit terms with current customers/funders, negotiate the shortest reasonable terms, and carefully review the credit-worthiness of each new customer/funders before extending credit.
- Continuously monitor accounts. Failing to collect receivables timely (or even on an accelerated basis) may result in a cash flow shortfall with an immediate impact on all areas of your organization.
- Negotiate for the most favorable credit terms with suppliers/vendors and critically evaluate your supplier/vendor base to determine if your current agreement is still the most favorable for your organization. For example, pay 30 or 60 days, not on receipt or even at 10 days to take advantage of discounts. Cash is king.
Boyd: Craig – this is a critical point. Right now with shelter in place and some organizations in financial distress- there should be a lot of caution to shipping product or providing services without assurance that 1) the organization is able to pay and 2) they are even able to accept the product being shipped. Before services are performed or product is shipped we should be making a final assessment of risk. How would you begin to evaluate changing terms or negotiating advanced payments for work performed?
Arends: Communicate early and often with your lenders-- your existing lenders will likely know you and your organization best. Communicate with them early and often, explaining any situations that may arise and the actions you propose to address them. Transparency and open communication will serve you both well. Your existing lender could be your fastest source of additional liquidity.
- Evaluate potential covenant breaches based on the outcome of various scenario analyses impacting your financial forecast.
- Conduct detailed modeling of your working capital facilities, particularly with asset-based loans, which can change their availability formulas due to updated net orderly liquidation values via new appraisals.
- Stay current on your debt if possible and assess capital structure concerns, including whether you should consider refinancing or recapitalization alternatives.
- Engaging in key stakeholder and lender discussions early can provide you the time and liquidity to address your potential financial challenges.
Boyd: Are there any key pieces of information that should be pulled together to share with your lenders during these frequent conversations? What if an organization is struggling to stay current? What should an organization proactively do?
Arends: The SBA announced it would offer disaster assistance loans and was having calls and webcasts last week talking about loans for up to $2 million for small organizations affected by COVID-19. Last night with the CARES Act many of the provisions were waived, increased or amended in favorable terms. So, more to come as CLA and others process the bill’s provisions on eligible borrowers, covered period, max of loan, use of loan, etc. In addition, there are many other organizations at the Federal, State and local jurisdictions announcing different ways in which they are looking to provide assistance via grants, loans, etc.
The COVID-19 pandemic presents new challenges and a chaotic organization environment. By focusing now on cash flow and liquidity, you can provide your organization with the financial cushion and flexibility to weather the storm.