5 tips for surviving Covid-19 when revenue is lowered and expenses are still the same
Taking decisive actions to temporarily reduce overhead expenses today can possibly help companies survive the Coronavirus crisis and keep the operations going.
For many medium to small businesses—at least the ones that have been forced to majorly scale back their operations or completely shut down—the disruption triggered by the Covid-19 pandemic poses a long-term threat to business surviving past this June 30th. I recently read an interesting article published in Bloomberg titled Planning for Survival: Holding On to the Cash You Have, that discussed a few strategies that businesses should explore using to find a away to through this. When your business has been ordered to close or consumers have drastically shifted spending, this may have hurt the revenue and cash flow of companies over the past 2 months. Meanwhile their expenses continue to rack up as if nothing has changed:
- loan payments
- and other obligations still come due every month
Many small businesses do not have the balance sheet and financial buffer to ride out a shutdown that could last a few more months with-out getting back to doing business. A Bain and & Company article about safeguarding liquidity and protecting cash mentions that the challenge ahead is weathering downturn and disruption. Companies in every industry are being tested as never before. Some will not survive. Most are likely to experience a slump in revenues and profits.
JPMorgan Chase Institute of the bank’s did a study in 2016, analyzing it’s small business customers in major cities found that less than half of them had enough cash saved to pay bills for a month. And only 25% had enough saved to pay bills for 2 months. So the key to surviving this crisis is finding a way to conserve cash. In the Bloomberg article, counselor at the Small Business Development Center in Kennesaw, Ga Andy Fried said “you need to hold on to whatever you have.” He also mentioned that “most expenses are variable—you can control them. Some are fixed and uncontrollable, like rent. You really need to focus on the uncontrollable expenses.” And if we compare this crisis to the 2008 recession, where the bailout was for the big banks, there seems to be widespread consensus that consumers and small businesses need a safety net—and at least for the short term, the federal government has delivered one, and others have followed suit. Bloomberg gives a few suggestions on what options can be taken as small business to lessen the financial strain and the possible renegotiation of credit terms.
Here are 5 things that small business owners can do?
1. Look to the SBA.
The author suggests that if you have a term loan guaranteed by the SBA, the federal government will pick up your payments, both principal and interest, for the next six months. This should happen automatically for all payments due after March 27.
2. Give your bank a call.
If you have a traditional business loan, call your bank and ask them to reduce or even defer your payments. There is no guarantees. You can ask fro a three-month payment deferral with either a loan extension or balloon payment at the end, or try get the terms of loan extended, to lower the monthly payments.
3. Give your landlord a call.
The Bloomberg article cites a recent survey by the Pension Real Estate Association, which noted that around 86% of landlords are considering rent reductions or perhaps deferrals with at least some tenants, and almost half have already had to make some concessions. A real estate and finance professor at the Wharton School, Susan Wachter said that “most landlords across the U.S. don’t have a potential tenant knocking on their door.” She further noted “they either extend, or they have an empty space for the foreseeable future.” The SBA counselor Andy Fried is also a landlord, and he has decided to offer his tenants 2 months deferred rent or 4 months of half rent. The article also noted that Small Business Development Center counselors in the state of QWashington are advising small-business owners to ask for rent deferral for at least three months, in exchange for a lease extension or repayment spread over the remainder of the lease or in a lump sum at the end. Don’t cry to hard for the landlords, they also are asking for concessions from their lenders.
4. Give your insurance company a call.
An insurance broker from New Jersey Jeff Perlman told Bloomberg “most insurers are reducing premiums for businesses idled by the pandemic.” as an example, liability insurance premiums are calculated based on business revenue, and if revenue falls during the policy’s term, premiums can be adjusted downward proportionally. Mr Perlman went on say “we’re finding that 95% of the underwriters are agreeable to a negotiation, within reason.”
Another thing to note, is that if you have sent your employees home, even if you have managed to keep them on payroll, then you ask for a reduction on your workers’ compensation premiums. You can then also ask your agent to see if they can change their job classifications codes to less expensive categories, such as clerical work. Be tough and consistent with your agent, because you have to be aware that they work on commission, and some of their compensation is tied to amount of the premiums you pay, which maybe a disincentive for helping to reduce them.
5. Many utilities and taxing authorities are also offering forbearance.
Among other variable costs and expenses, companies sometimes have a hard time managing unsold inventory buildup, finding the right balance between holding too much, and having enough cash on hand to weather rough times. The Bloomberg article referenced Steve Burke of Small Business Development Counsel who had this advice “take a thorough inventory, return what you can, and cancel future orders. See if you can put off paying vendors. “ He further added “at the same time, if you have receivables, try to reel those in—perhaps by offering a discount for faster payment.”
There is a reason why stock analysts will talk wanting to invest in companies that have a strong balance sheet and the amount of cash on hand. During a pandemic slowdown such as what we are seeing, will have different outcomes depending on the situation. As the Bloomberg article mentioned “a weak company going to into this disaster, they’re simply not going to make it. But if you’re a company with a moderately strong balance sheet, you have more assets than liabilities, I think you can really get through this thing.”
For the last 2 months this controlled shelter in-place shutdown has put a significant financial strain on many business both large and small, of which I helped some of my clients get thru the paper work and red tape to get the emergency payroll loans. If the economy does not start to a least partially reopen by June many companies will be in uncertain territory, that is why I am suggestion that companies should one of these 5 tactics listed above to try temporarily lower their expenses. Companies should also initiate daily spending review sessions to challenge all purchase requests and instill a ruthless cash-preservation mindset across the organization. If any business has any questions or wants to some professional advice feel free to contact Huckabee CPA for a free consultation.