Category Archives: In The News

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

Made IN AMERICA – 2.0

It’s both amazing and disheartening to see the politicizing of a Covid 19 pandemic that has rocked the USA and the world. Too many politicians place getting elected above problem-solving from what amounts to serious bio-medical warfare, intentional or otherwise . Clearly, too, they’ve shifted the more important attention away from the real culprit in this ordeal. Their immediate focus should be on assuring that another pandemic is not on the horizon. Nor should stated adversaries be allowed to finance their nefarious strategies through business wealth that we have negotiated away over the years.

It is difficult to fathom the nonchalance and outright belligerence of the Chinese government. Not only do the Chinese discount any claim of responsibility, but they continue to attack on many different fronts ranging from regional territorial grabs, to human rights, to intellectual property thefts and espionage. Oh, and hoarding medical grade masks and other PPE.

Critical American manufacturers, including pharmaceutical companies, should immediately onshore every product made there. Any other company that is involved in a defense-capable or critical technology industry-related venture should be required to produce here if they choose to remain a USA-domiciled corporation. National security and patriotism isn’t an option. A case can be made that the U.S. Defense Dept. should play a bigger role in deciding what goods and services are allowed to be made abroad.

Free traders forget fair trade. Nothing is fair about the current imbalance with China. At a minimum, they have outflanked our government trade negotiators. They only take enough non-strategic goods to satisfy our modest export quotas, like agriculture products and cars, while reverse engineering all of the more valuable and critical technology we allow there. And try and get these Chinese government-owned companies to export their valuable resources, like the rare earth minerals that are vital to much of today’s technology. All in all, American companies that export technologies or manufacturing processes that threaten our way of life, health and national security need to be brought back home. And that return would also provide both capital and opportunity for our entrepreneurs and small businesses.

The old mantra of free markets and global trade is just that…old. The U.S. must restore a legacy of controlling its own destiny and ability to guard against any and all threats domestically and around the world if it effects American interests. That’s not to say we need to be the sole 1960’s Cold War Era world cop. What’s required is overwhelming domestic-made defense materiel capability and enough deployment flexibility to smother any attempt by rogue countries to sponsor violence and terrorism as they see fit. Another long overdue initiative is to prevail on so-called allies, most notably the French, Germans and Swiss that allow their military and companies to continue to arm and aid many of the most despicable worldwide terrorist groups and regimes.

Many investor and shareholder- beholden U.S. companies will complain about cost disadvantages of bringing home our manufacturing prowess. They forget the fact, as we’ve noted in earlier posts, that virtually every good or service made in a Far East country came from here originally or was copied or taught by U.S. providers after WW II. They ignore the reality that this economic transfer has significantly eroded a good share of middle class wealth. True, cheap imports lessen the supply-side cost of buying a good or service, but lesser wages paid in replacement alternative jobs, similarly lessens what consumers can buy. Consumption ability counts at least as much as supply and it behooves the U.S. to regain a bigger share of worldwide production. Not a good net/net trade-off that sends a healthy chunk of our economic output elsewhere. Who would have guessed that a formerly poor, largely agrarian economy like China would now have more billionaires than the U.S. in the space of 25 years or so. And possess state of the art technology and manufacturing production that we largely “gifted” away.

This loss of manufacturing and technology capacity to overseas providers exacerbates the other major deflator to future U.S. economic growth. The brilliance of technology on all fronts has more than halved the number of people and mid to high wage jobs needed to perform a wide variety of functions and tasks. This one-two punch of offshoring wealth and settling for more modest wages has to be addressed and reversed. When you combine preserving the prosperity of the American way of life with critical national defense and the peaceful protection of people around the world, why would you choose to do otherwise?

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.

made in america – part 2

Here’s an excerpt from our Blog Post dated January 2, 2015. Lastly, at some point, our government and the macro-business community needs to realize that depending on others, particularly China, a devious business partner at best and a self-avowed U.S. foe, is a not only a shortsighted business strategy, but one that has much broader national security implications as well. Again, hearkening back to our WWII lessons, having an ever-ready, flexible, and potent manufacturing infrastructure at hand meant the difference between victory and defeat. That is no less a potential consideration in today‚Äôs rapidly deteriorating socio-political world climate.

Unfortunately, our admonition of 5 years ago is proving accurate. Clearly, going forward this offshore-derived Covid 19 pandemic demonstrates the material risk in relying on other countries, particularly the forever-adversarial China.

We will likely overcome what we presume is a serious, but temporary, health and economic disaster that may take 12 to 24 months to run its course. During this time, it is incumbent on both our government and corporate businesses to onshore all vital manufacturing processes and products. There’s nothing being produced today in the Asian-based region that wasn’t first created, invented, and made in the USA. Such a fundamentally sound move will restore a great deal of US prosperity and, decidedly, bolster US security on several fronts.