Category Archives: Financial

CASH FLOW Budgeting 2021

By now, you have likely adjusted to the pandemic-caused new normal run rate of your business. Ideally, you would have already completed a 2021 budget that reflects today’s stressed starting point and the recovery path that may result from Covid-stopping vaccines. And, put this plan in motion towards a more profitable new year.

If you were one of the fortunate few small businesses that escaped Covid’s wrath, you still should plan in order to assure you’re building the capital reserves required for the next time business conditions jeopardize your company’s financial health. Government financial assistance like SBA EIDL and PPP loans or the Fed’s Main Street Loan programs may not always be available. What is certain is that domestic political tensions will impact economic winners going forward; as will the enormity of work from home, disruptive innovation, technochasms and digital transformation of the workplace. Keep in mind, too, that the Covid-19 virus has proven more resilient than first thought. So don’t get caught without a fast-reacting plan should that be the case.

Whether impacted by Covid or unscathed, your business needs to be positioned for whatever lies ahead. Budgeting and forward-looking cash flow planning assures you have a roadmap to follow and have alternative strategies in place for when results deviate from expected. As one military leader was once quoted as saying “no plan survives the first contact with the enemy”.

Be comfortable, based on current data, that you can achieve budgeted cash results. Blue sky projections are enticing, but normally unrealistic. Plan on a cash basis. Save your accrual versions for the IRS. The most essential part of budgeting is projecting cash flow and available funding for any temporary cash crunch. And then, living within your means (or cash net income).

Your business must generate consistent cash net income for you to stay solvent and build reserves. Additionally, many companies realize too late that they spend as much or more on investments or financing costs as they generate in cash operating income. So company survival is just as much about what you spend as what you make. Don’t fall into the trap of becoming a “paycheck replacement” firm. Yes, you can write yourself a check that equals monthly profit, but without routinely building reserves, you’ll suffer if any unforeseen shortfall occurs.

Stress testing your revenues, cost of goods sold and SGA expenses on a cash basis is an important early warning tool that establishes the amount of any cash “cushion” that your business may have if the unexpected occurs. You can quickly determine what is required to at least operate on a break even basis. That’s not ideal, but it gives an important reference point for walking around knowledge. What would happen with a six month 10% sales or price decline, or a next quarter 15% increase in costs? Would you still have positive cash flow? This tool, calculated out at least 18 to 24 months on a monthly basis, will identify any cash positions that go negative. The earlier the warning, the more likely a favorable solution can be found. Finding out you’ll run out of cash next week or next month is way too late. This stress tool will identify how long your cash balances and reserves can fund your operating expenses. It is also imperative to have cash contingency or borrowing facilities in place to reestablish a positive cash position.

If you would like more information or assistance in developing a cash flow budget and/or stress test template for your business, please contact us.

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.