Inoculating Your Business Against Coronavirus (COVID-19)
Since the first suspicious cough in Wuhan China, the Coronavirus has exploded to become an offical pandemic. Plenty has been written about the impact on people, but there are another set of legal lifeforms that are being infected - businesses. Around the world supply chains are locking up, trade in either slowing or halting altogether, & governments are acting to lessen a demand slowdown.
With seemingly every business, of every size, in every industry, everywhere in the world being impacted, I wanted to explore some practical ways businesses can inoculate against coronavirus (COVID-19).
Who will it impact the most?
Just like we are seeing COVID-19 hit the elderly & those with pre-existing conditions worst, businesses are no different. If your business is unhealthy, you will need to be particularly careful. For instance;
Are you already struggling to pay suppliers on time?
Are you finding yourself going deeper into debt?
Do you have bad debt issues, or customers you feel will use the pandemic as an excuse not to pay?
Are your taxes late, or behind?
Are your employee entitlements up to date?
Is your admin & office a shambles?
If these questions make you think of your business, then you need to start acting NOW to clean up your issues. Disinfect your business. Get organised, & get a plan together - Immediately! How much money can you bring into your business? Customers, from yourself, friends & family, investors, etc… Just like basic hygiene, CASH in the bank in the surest way to keep your business safe.
Weathering the COVID-19 pandemic - Understand your Time To Out Of Cash.
What is your ’Time To Out Of Cash’? How long do you need it be? What can you do about it?
Time to Out of Cash is an extreme financial health check on a business. Think of it as ‘If everything stopped, how long could I keep the business open for, without changing anything?’ Calculating your Time To Out of Cash is easy. Think of it as;
AVAILABLE CASH = Combined Available Bank Balances + Accounts Receivable ($ you are owed) - Accounts Payable ($ you owe)
divided by
CORE CASH BURN = Monthly Operating Expenses + Monthly Debt Servicing Costs
* Note that cost of goods sold (COGS) is removed as the assumption here is that sales stop altogether. No sales = no COGS. Also owner & investor drawings are removed, but you could add them back into the core cash burn if relevant to you.
For example - assuming a business had $25K cash in the bank, with a $100K overdraft, $250K owing to it, $150K owing to their supply chain, wages + rent + other operating costs of $45K per month, & total loan repayments across equipment of $7.5K per month. Their time to out of cash would be;
AVAILABLE CASH = $25K+$100K+$250K-$150K = $225K
divided by
CORE CASH BURN = $45K+$7.5K = $52.5K
225/52.5 = 4.3 months. Roughly 12-13 weeks.
How long do you need your Time To Out Of Cash to be?
Let’s put this question into some perspective... It looks like the most extreme halt to businesses would be anywhere from 14-30 days; Italy’s quarantine period (14 days) & the USA-EU travel ban timeframe (30 days). Within circa 100 days infection numbers in several countries begun to plateau. This hints that ‘business as usual’ could return in about 3 months.
Using that logic as a base, if you could get to 3-4 months that seems to be a pretty safe start based on current world events. Basically you want the longest possible Time To Out Of Cash for your business.
If your Time To Out of Cash is 8 months or more, you can probably rest easy. But what if it isn’t..? How could you raise your Time to Out of Cash?
In theory, simple. Either by lifting the available cash and/or reducing your core cash burn. Fine, but practically how could you do that? Every business is different but let’s explore some possible tactics.
Lifting Available Cash
Collect from your customers! If your customers owe you money get onto them immediately. Push, push, push. Be kind, but be firm. Remember they’re going to be in the same boat. Can you work out a payment plan, or a discount for upfront/early payment? Do you work with government or large corporates? See if they can pay you quicker. Ask, ask, & ask again. Australia’s Prime Minister made a point of telling big business to 'pay your suppliers.'
Fund via friends & family. Do you have friends, family, suppliers, customers, even employees who could lend money to the business temporarily? Think about people who you could trust on a handshake. Maybe an employee is happy to have their salary paid over 2 months instead of 1 month. Maybe a customer knows your business is critical to them so they’re happy to pre-pay future orders - “here is $10K, keep it on account, we’ll use it when it’s all over.” Maybe you can give them a little price discount to say ’thanks.’ If you have investors, what is their ability to inject cash in at short notice?
Speak to your bank. We’ll cover some other bank tactics in Reducing Core Cash Burn below, but if you have loans speak to your bank about extending the limits. Could you for instance obtain a 25% increase in your overdraft for 30-120 days? Tip - speak to the ‘financial hardship’ division of your bank. They are usually the best at addressing such questions quickly.
Customer pre-payments. Do you have customers that order regularly? If so, you could float an idea of them pre-paying some future orders, for a discount. If you know them well, you might find they are willing to help.
Adjust your trading terms. Your trading terms - how quickly you pay out & how quickly you should be paid, should be designed for regular trading conditions. There ain’t nothing regular about the whole of Italy being locked down! Therefore, adjust your terms accordingly. You may require COD or a form of deposit payment, extend terms on new/ future suppliers etc… Make your cash cycle work for you.
Anything you can sell? Anything lying around in the office you can sell? Any excess inventory? Any assets sitting idle? It may not be the best time to sell, but if it means extra cash to survive every bit counts.
Check your insurances. Ever since SARS in the early 2000’s most insurers now exclude the economic impacts of something like COVID-19. However, all may not be lost… Do you have a claim under your travel policy for those cancelled flights? If you have an insurance broker speak with them & understand what options you may have.
Do you have any ‘free’ assets? Do you have any assets that have no debt against them? Maybe a car, truck, some pallet racking, premises etc… If you do, well worth speaking to your bank or a finance broker to understand if any of these assets could be used as security for a loan. You might not have to use it, but could be a useful card up your sleeve.
Sales. Whilst not part of the Time To Out Of Cash equation strictly, every business needs sales. What opportunities are there now to re-shape your products & services to fit this rapidly evolving market? Can you deliver your products & services differently? Can you reach out to new markets? How can you price them & market them to build immediate sales & therefore your cash levels - especially if you have adjusted your terms to fit? For many businesses marketing right now may be relatively cheap & in a relatively uncrowded marketplace.
Reducing Core Cash Burn
Talk to the tax man. Governments across the world will be acting to curtail demand falling in national economies. Are there any programs, grants, payments, breaks etc… that you could take advantage of? Furthermore, speak to the ’tax man’ of your country. If you owe them money, now or in the future, could this be put onto a payment plan, delayed, reduced, or all of the above? If you have a payment plan & the tax office is charging you interest, can you have the interest remitted back to you given world events? Taxes are typically 20-40% of company profits. That is a huge expense, so anything you can so to either reduce it overall, and/or stretch it out over time could really help.
Speak with your bank. If you have regular loan repayments, ask your bank if they can temporally halt repayments. While you are on the phone, can the bank do the same for any of your employees with mortgages? Can the term of any loans be extended to reduce the overall monthly payment? Can any loans be restructured or refinanced for a better deal?
Speak with your suppliers. Which suppliers do you owe money & how much? Are there any you could cut a payment plan with, extend terms with, or otherwise strike a deal with? Speak to them. See how they are being impacted? How can you help them? How can they help you? We are in this together, & we are going to need each other when demand ramps up on the other side - & it will.
Meet with your employees & keep them up to date. You are going to need your employees. Just as you have a business, they have a family. Chances are they are just as nervous as you, if not more so. They need to know the business has their back & everything will be done to support them through this uncertain time. Keep up communication. If things are tight, can you cut deals? Maybe some of your long-term employees would be happy to lend the company some funds at a great % rate. Are any happy to take leave? Find out who is most scared & why? How can you help them? Could you go down to 3-4 days a week across the board temporally, if that means nobody has to loose their job? As with suppliers - we are in this together, & we are going to need each other when demand ramps up on the other side.
Speak with your accountant. Your accountant may be just the weapon you need to access government assistance, talk with the tax man on your behalf, help you understand your figures & financial options etc… They often have relationships with multiple businesses & may be able to provide you with tips & tricks as to how other businesses are managing.
Dive in & review your figures. Now is the time to get to know your figures. How much are you spending? Where are you spending it? Where can you save without loosing longer term capability? Where are you wasting money? What is not providing a return? Any contracts you can renegotiate? Any troublesome contracts you can get out of? How much can your sales decrease before a financial pinch is felt? How strong are your margins & why? What is your operating, free, & net cash flow? How can you optimise each type of cash flow? By diving into your figures you may very well see opportunities to not only help your business now, but also well into the future. This could be a real opportunity to 'clean house’ & become stronger long-term.
Adjust your lifestyle temporarily/ halt distributions. This may happen naturally, but can you as the owner reduce how much you withdraw from the business? Do you normally pay a profit distribution to stock/share holders? Can this be halted or reduced? If you are the CEO, can you & your executive team take a temporary pay cut to lead by example?
Speak with your industry association. Just like speaking with your accountant about tips & tricks, you may be able to reach out to a relevant industry association for advice.
Get professional help. If you do not have someone helping you through this - get help. We are all in this together & you do not have to be alone. Business coaches, finance brokers, accountants, bankers, insurers, mentors, & HR people to name just a few can probably all engage with you remotely if nothing else. Do not suffer in silence. Reach out & ask for help. RBI is doubling down its commitment to all clients through this period, & anyone with concerns is welcome to reach out me, David directly at david@rightbraininsights.com for a no obligation & free chat.
We are in this together people. In Australia, Europe, Asia, North & South America, Africa, wherever… Any thoughts, comments, tips & tricks? Let’s help each other out.