Our Firm has had the unfortunate experience of seeing a very profitable business be liquidated because their cash flow was severely disrupted due to the outbreak of Covi-19 and they could not pay rent or wages after the expiration of PPP funds.
Cash is King in current turbulent times and for your business’s survival. Keeping the cash flowing is critical for any business to survive and many businesses were unprepared for the impact of COVID-19.
As the government starts to relax lockdown measures and starts to open businesses, many organizations should take this opportunity to review their future plans including their cash flow for the recovery phase. You could be working this week and then in lockdown next week because of a Government directive, or because you or a family member is a close contact or a casual contact of someone who has tested positive to COVID. If you have staff, the damage could be compounded.
1. Know your business numbers and your financial position
Small business owners may well be in the driver’s seat, but many of them are driving without a roadmap and, if they’re looking at their numbers, they’re looking at them through the rear vision mirror. But it doesn’t have to be that way. Many businesses have found themselves with no cash buffers in their business and personal accounts. They’d been driving blindfolded, not aware of their business profitability or the level of debts racking up.
COVID-19 has brought to light issues that previously had been glossed over. It is likely that your cash flow is already being squeezed by a reduction in income together with additional expenses such as increased health and safety costs. A fresh pair of expert eyes may be able to assist you in evaluating your options more strategically and by identifying potential changes you can make to ease the pressure. Often a brief conversation with someone who understands the challenges you are facing can give you a fresh perspective or some new ideas.
Being able to see the profitability, assets and liabilities of your business in real time means that you will hit those road humps a lot less frequently.
2. Pay yourself first and set yourself targets
Running a small business can be tough and there’s a tendency to take what it left at the end of the week.
Or maybe you take a standard amount of money haphazardly, irrespective of whether the business has made that much money. And that’s when the IRS and credit card debts start to blow out.
Whenever I suggest business owners pay themselves a regular amount from their business, it’s met with trepidation and questions like “but what if there isn’t enough money?”
The fact is, your personal bills don’t reduce if your business’s profit reduces.
Prepare your personal budget and determine an amount you need to generate from your business with a little buffer added.
So, guided by your numbers and your targets, if your profit is dipping and it’s likely that there won’t be enough money to make that weekly amount you need, you could put some of those contingency plans in place. Chase outstanding debtors. Finish off that job and invoice a few days ahead of schedule. Review your job costs and compare to your quote. Review your overheads. Revise your hourly rate.
You’re free to take more money out later on when cash builds up and you have your tax and employee obligations (if you have any) set aside. Again, your accountant can assist you
3. Protect your assets
For some business owners, their liabilities many be unlimited and both their business and personal assets may be on the line and they may be unaware of this.
Now may not be the optimal time to change business structures, as doing so may affect your eligibility to COVID-19 support, but it may be worth having a chat to your accountant to ensure your assets are adequately protected for now and whether it may be prudent to change your business structure in the future. Even if only one owner, incorporating your business as a limited liability company (LLC) will limit creditors of the business to seek recovery only from the business.
As the saying goes “don’t put all your eggs into one basket”. With increased possibility of being sued and scams, mitigate risks by diversifying your assets. You can give property to family members, such as a spouse or children. Property jointly owned with a spouse using “tenancy by the entirety” has strong asset protection. You can also use trusts to add a layer of asset protection.
As a minimum, be sure to carry sufficient liability coverage, which is typically part of your business owner’s policy (BOP). Professionals should carry malpractice coverage. Consider an umbrella policy to add protection on top of existing coverage at a modest cost.
4. Be proactive with spare dollars: Set aside and save
Many businesses have slow seasons due to the seasonal nature of their products or services, and this makes it easy for entrepreneurs to anticipate lower revenues, and plan accordingly. That was not the case with the COVID-19 pandemic. It struck without much warning and caught businesses off guard. As businesses temporarily close their doors, stay open in a limited capacity, or transition to remote work, they still have expenses. Their employees, suppliers, and vendors need to be paid. Of course, there are a number of other business expenses, such as office rent, utilities, insurance, phones, and postage.
Now is a good time to review your company’s expenses to identify those that you might be able to cut. Obviously, you cannot avoid paying office rent and business insurance, and you want to keep as many employees on your payroll as possible, but there are ways to trim your budget. For example, you can put the brakes on travel, trade shows, and company perks and freebies. Also, contact your accountant to ask if you can delay certain payroll tax deposits, or break them into multiple payments.
There is no telling how long the COVID-19 pandemic will affect the U.S. economy, so be proactive and start building up your cash reserve. You can start by totaling your company’s monthly expenses, and seeing how much cash you have remaining at the end of the month. Put as much money into your savings account that is feasibly possible.
If you cut any business expenses, you will have more cash on hand. Take a reasonable amount of what you would have spent on business expenses and stash it away for the future. Putting away even the smallest amounts of cash will add up faster than you might imagine.
5. Check out state, local, and private resources
When you backed yourself and started your business you took a considerable risk. And you deserve to be rewarded well for the risk you took.
Some believe that their retirement nest egg is in fact the business they are building. But we’ve seen during COVID-19, businesses that have been successfully operated for generations have been wiped out overnight and some have even been left with debts.
The Paycheck Protection Program is winding down, and even at its height, getting a forgivable loan under the program has been quite challenging. In the meantime, you can expect your cash flow to remain tight.
Many state and local governments and private corporations have already stepped up to offer special emergency loans, grants, and pools of funds to assist small businesses. While the CARES Act has gotten all the buzz, there are other local programs that exist. In Maryland several jurisdictions have similar loan & grant programs to do the same or serve a similar purpose.
Here is a quick list of jurisdictions with programs (click the link for additional details)
Anne Arundel County, Baltimore City, Baltimore County, Carroll County, Cecil County, Frederick County, Montgomery County, Prince George’s County .
If you need new funding, explore the following options:
- The SBA’s Economic Injury Disaster Loan Program, which offers financial aid of up to $150,000 and an emergency grant for small businesses of up to $10,000
- The SBA’s 7(a) Program that offers loans of up to $5 million for working capital infusion, refinancing debts, and similar uses
- The SBA’s 504 loan program, which also offers funding of up to $5 million for such purposes as buying real estate or equipment
- The Federal Reserves’ Main Street Lending Program, which offers loans for small and medium businesses at a minimum amount of $250,000
- While you may not be able to match the 1 percent rate of emergency federal stimulus, good credit and a good relationship with your local lender means that loans today generally remain affordable. Explore any existing lines of credit your business has or could establish, particularly if there’s land or equipment that could secure a loan.
- A revenue-based financing from your bank, which provides funding to produce a product or service in exchange for a percentage of your business’s revenues
Always keep in mind that each financing option carries certain risks and requirements, so it’s advisable to consult your accountant before signing on to any of these.
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PPP Loans Are Ending. Here’s Where Small Businesses Can Turn Now, CNBC.com
CPAs Tell How to Stay on Sound Financial Footing During Crisis, BusinessJournalDaily.com