Liquidity, timing of collections, contractual obligations, how to work with vendors and customers are just a few of the topics that come to mind when evaluating cash flow forecasting and managing debt compliance. Navigating through the disruption has not been an easy task for restaurants and retailers— making cash flow management an integral element of business operations. The following considerations can help you optimize your business operations.
Cash Flow Forecasting
- Revisit your cash forecast and balance with monitoring debt compliance regularly.
- Create scenarios for sensitivity analysis and adjust assumptions based on the current facts and circumstances to give yourself a sense of possible outcomes. As an example, make adjustments to forecasted income and provisions by running three scenarios to include: variations of minimal, moderate and maximum changes in customer mix, collectability issues and slow-down inactivity.
- Build-in contingencies such as building up provisions and allowances. Include the potential for loss contingencies if probable and estimable on legal matters.
- Consider the impact of debt covenant breaches that require you to reclassify long-term debt to current debt if a waiver is not provided by your bank.
- Consider debt restructuring to improve liquidity.
Consult Your Banker, Accountant, Insurance Company and Vendors
- Speak with your bankers and accountants regularly to assist with financial decisions.
- Speak with your insurance company to review policies and coverage.
- All business partners are more important than ever. Consider diversifying your venders to allow for negotiation and to compare prices.
Accounting Considerations
- On the accounting side, hedge accounting could be substantially impacted. Income taxes and NOL carryback impacts may provide some relief. Address if deferred tax assets are meeting the more likely than not tests to be realized and when to plan for any tax benefit.
- Address Audit Committee/Owner communications and governance. Process owners need to communicate changes to the owner/board entity levels to identify where risk can be reduced and operational changes can be made to reduce or control associated costs.
- Address any reporting issues. A top area of concern is the impairment of goodwill which will reduce the strength of your balance sheet.
- Consider the company’s status as a going concern. Make sure to adapt to any changes to ensure the business can continue for more than one year by focusing in on essential operations. This will assist with bank compliance to provide for ongoing liquidity needs.
- Management needs to focus on how to adhere to bank covenants on an ongoing basis so that banking resources remain available.
- Address revenue recognition and liquidity as both are very impactful. Push to get cash in the door by increasing and personalizing collection efforts. Consider negotiating prompt and early pay discounts where feasible. This may work best on small accounts with higher risk.
- Consider personal guarantees, but protect your personal finances. Plan properly and know the risk you are willing to take on the business side if you provide personal guarantees.
The COVID-19 pandemic brought on a realm of unpredictability, making it important for business owners to adapt to the current uncertainty and be prepared for future disruption. It is inevitable a variety of costs will arise, but cash flow management can help businesses weather the storm.