Category Archives: Budgeting

Stress TEST YOUR BUSINESS!

Stress Test your business. The 2020 pandemic has wreaked havoc on the worldwide economy and businesses of all sizes. Not surprising, small business owners have suffered the most. Originally applied by regulators strictly to banks and other financial services companies, it is an equally relevant survival tool for small businesses of all types. This cash and liquidity analysis needs to be done sufficiently in advance to allow for the development of a plan for positive action and improved results. The goal is to understand how many months you can survive an assault on your cash and liquidity reserves. As we’ve seen, the current economic debacle has exposed a liquidity shortfall in many businesses. Many operate on a week to week or month to month basis. Any cash net income hiccup can be disasterous. While the SBA’s EIDL and PPP loans have injected needed capital into many businesses, a good number are already seeking additional funding as the pandemic continues longer than originally forecast.

The stress test goal is to quantify a negative economic event’s impact on your financial results beyond what you had been expecting. This event might be solely applicable to your business (a fire or loss of a major customer), or your industry (hospitality), or on an even broader basis as we’re experiencing with the 2020 pandemic crisis. This evaluation will help you measure the degree of cash and liquidity sources available to weather any temporary downturn.

As a rule of thumb, six to nine months of cash on hand and liquidity access will ensure a business’ survival of most events. A year or more is better, particularly if there is access to unused borrowing facilities. More seasoned firms may have built a larger retained earnings surplus. Some smaller firms will say that’s not practical or doable and that may be true. They operate knowing there’s no margin for even a single month’s cash loss. Every business owner should want to know how close they are to possibly going out of business because of insolvency. If there is no good way out, it’s better to know sooner than later. The reality of most business failures is that there wasn’t sufficient capital to remain a going concern. More than 50% of small businesses fail within their first few years for this very reason.

A Stress Test is essentially a cash basis evaluation of your business. It helps identify how long your business can remain cash solvent under less than normal conditions. Your 18 to 24 month future period pro forma or budget is the starting point for such a review. Using your forecasted financial performance, both income statement and balance sheet, you then superimpose such stressful events as a sales decline, a competitive price drop, a higher cost of goods sold, or an increase in operating expenses.

This more critical look quickly identifies whether the business will continue to generate actual cash net income. If not, then you’re in a net cash “burn” scenario drawing against your operating reserves. That’s where advance planning needs to kick-in. What revenue, expense, people, capex actions can be taken, easy ones first and, if necessary, then the more difficult decisions that have to occur to help your survival chances. It’s not enough to be resilient, to fight the good fight, it’s to survive such a catastrophic time period and go forward.

Projected Cash Sales – Jan – Mar$53,900$64,800$71,500
Select Stress Level: 5% Down = .050.050.10.15
Stress Cash Sales $51,205$58,320$60,775
Stress Test of Sales Decline

As illustrated in the sample above, the stress impact on this business was a three month reduction in sales (and cash) of $19,900 or 10.5%. Being able to quantify such a shortfall, in advance, is key to managing your way out of it. Western Equity can help your business create a stress plan and determine alternative strategies. Please contact us for more information.

FRB Main street loans

The Federal Reserve Bank of Boston has launched their Cares Act-related Main Street Loan programs. These 95% FRB guaranteed facilities are aimed at higher-end small and mid-sized businesses that were performing well before the Covid 19 economic disaster. Certain non-profit organizations are also eligible. They are available through participating banks. Not all banks have signed up at the time of this post.

Most businesses will vie for the “New” or “Priority” loan options that start at $250 thousand ranging to $35 million or $50 million. These are five year floating rate term loans. The interest rate is either one or three month LIBOR plus 3.00%. At this week’s current rates, that would create an interest rate slightly below 3.25%. Interest payments are deferred for the first year and principal payments are deferred for the first two years. Full loan amortization occurs during years three through five.

Eligibility is tied to a borrower’s 2019 EBITDA. From the two loan types above, the borrowing amount is either 4X’s 2019 EBITDA less existing loan amounts and unused credit lines or 6X’s. The remaining amount calculated must exceed the $250 thousand threshold. There is no loan “forgiveness” associated with these loans. Essentially, these Main Street Loans are targeted toward larger, more profitable companies than the earlier Paycheck Protection (PPP) and Economic Injury (EIDL) business loans and grants of the U.S. Treasury and SBA. For more information, visit https://www.bostonfed.org/supervision-and-regulation/supervision/special-facilities/main-street-lending-program/information-for-borrowers.aspx

SBA Disaster Loans

Most U.S. businesses, except the very large, are eligible to apply for Covid 19 – related SBA Disaster Recovery Loans. There are two major initiatives: 1) Economic Injury Disaster Loans (EIDL) – keeping businesses viable by operating expense and debt payment loans, and; 2) Paycheck Protection Program (PPP) – protecting employee staff count and payroll contributions by loans to fund these costs as well as building and utility expenses. It’s beyond the scope of this post to discuss the considerable detail associated with these initiatives. Businesses are eligible to apply for both loans. Check www.sba.gov for more details.

Uber and Starbucks Top Business Expenses

Uber and Starbuck Business Expenses
Business Expenses

Third quarter 2018 business expenses showed a decided thriftiness according to a recent study released by Certify, a leading travel and business expense tracking service provider. Their analysis consisted of reviewing more than 10 million expense reports that were submitted. Gone, apparently, are the Mad Men TV series days of two martini lunches.

Uber, Starbucks, and Amazon top the list of expense chits submitted. Even with this prominence, Uber’s 11% share and the other two’s 4% are relatively modest. Uber has negatively impacted traditional taxi, shuttle and limo services, but sees important competition from 6th place rival Lyft. Starbucks is making inroads with a more complete dining experience than just coffee service. Amazon is also catapulting on it’s known retail strength with more and more business users.

Other top ten companies expensed include travel-related carriers Delta Airlines, American Airlines, and National Car Rental. Familiar names rounding out the remainder of the leaders were Shell Oil, Walmart and McDonald’s. Hampton Inn, though not in the top ten, was the most expensed hotel chain. In food delivery, for those in-office working lunches, Grubhub continues to lead, but is threatened by fast-growing Uber Eats.

There are certainly exceptions to the low cost nature of reported business expense transactions, especially in long-lead or high dollar sales and service industries where wining and dining tradition still holds fast. Let your sales report and bottom line be your guide.

Need 2016 Q1 Consulting?

Consulting
Consulting

As Q1 2016 comes to a close in a few weeks, is your small or mid-sized business on track to achieve or exceed your strategic goals? Are there particular metrics that don’t measure up?

Are you driving revenues as expected with decent margins? Are you gaining profitable customers? Is cost control your only salvation to date? Are any new initiatives working?

Do you have links to your subsidiary functional plans that align so that your entire business is hitting on all cylinders? Is your communication process good at getting specific expectations to those colleagues that need to perform? Does everyone have “walking around” understanding of goals and objectives? Do they “buy-in”? In our experience, many planning processes are either too “elegant”, cumbersome or non-specific. Plans can fail if they don’t lead employees to the correct behavior every day.

Planning Maxim

“Doing the right thing is more important than doing things right”.

An independent consulting check-up can help determine if your internal planning, budget and operational reviews have identified material issues and any corrective actions that may be required. It may also uncover other factors that may be missed or are considered off-limits or sacrosanct.

Now may be the time for a fresh set of eyes. All too often, owners and managers are great cheerleaders for their business (as expected) at the expense of simultaneously being vigilant and fierce critics. It’s important to identify and mitigate any competitive weaknesses before your competitors or customers do.

As fabled GE CEO Jack Welch reportedly once said “change before you have to”.

The end result of a consulting evaluation may assure your company’s ongoing high performance results. Western Equity will consider consultative, interim, temporary, or part time senior engagements. Please contact us regarding your requirements.