The Financial Guide to Navigate Your Business Through This COVID-19 Crisis

April 7, 2020

COVID-19 hit the world hard and fast, leaving its trail of destruction across many different industries and countries. Last Wednesday, I sat as one of our client’s phones rang from 9 am to 12 noon straight. Each of those phone calls was his clients canceling and pulling contracts that were years in the making – ranging from $300,000 to $800,000 a pop. By lunchtime, we had lost close to 9 million dollars in revenue.

The knee jerk reaction was to unplug the phone, dig a hole, crawl in it and hope that it’ll all be over. That would, however, be very un-entrepreneurial of us though. We solve problems, we learn from our mistakes, and we forge forward. Here’s what we did.

Take Inventory of Your Financial Health

Fortunately for all of our clients, we had clear numbers and financials at the ready. So we looked at them and asked ourselves the hard questions.

  • What is our current cash position? (war chest) -find this on your balance sheet
  • What is our payroll obligation? -find this on your profit x loss statement
  • What type of revenue is going away, by how much, why?
  • What type of revenue is available, what is the gross margin and cash conversion cycle on these?
  • Using only the available revenue type margin, how much revenue do we have to sell to cover our monthly payroll obligation?
  • If revenue equals 0, how long will our war chest allow us to stay open? (months of cash reserve)

How Will COVID-19’s Economic Impact Ripple Through the Economy?

COVID-19’s greatest impact on our economy (currently) is caused by the shelter in place / no crowd / no event policy that we are currently enforcing to combat the spread of disease. The cancelation of events or travel means loss of revenue to the industries like sports, experiential, restaurants, and travel (let’s call them group 1.) The loss of revenue with these industries will then ripple through the economy as they are unable to hire their vendors (ie. event planning, marketing agencies) or support their partners (ie. merchandising, advertising industries.) These are group 2. Finally, as entrepreneurs and CEO realize that their revenue or cash are not coming in, they start working down their profit and loss statements and eliminate anything they can get their hands on (consulting, services, rent, SaaS, etc.) The 3rd and final group of companies.

Once we understand how the economic effect will ripple through, we are ready to work on our navigating our business.

Cash is King! Put It In Its Place by Doing Badass Forecasting

Most entrepreneurs make the mistake of thinking that revenue and cash (or cash flow) are the same thing and use them interchangeably. Some of them turn on “cash basis” in their Quickbooks Online’s profit and loss statement and think it the same as a cash flow statement. They are wrong.

During this time of crisis, cash is absolutely critical because it will decide rather or not you survive this. You see, most businesses rely on the money making machine they have created (illustrated by your profit and loss statement) to generate the cash needed to keep funding the business and its operations. During this time of crisis, that machine will grind to a halt and you are going to rely on the smart management of cash to buy yourself some time while you fix the machine.

Step 1. What is Your Current Cash Position?

Look on your balance sheet and see how much cash you’ve got. Don’t get fancy, not your line of credit, not your credit card, not any guesses you tell yourself. If you open up your virtual wallet that is your bank accounts, how much cash do you have?

Step 2. How Long Will My Cash Lasts Me?

Take that dollar amount and divide it by your minimum obligation to keep the business alive. That should be your staff’s payroll and taxes plus a vital few. Remember, our staff did not sign up for this crazy rollercoaster lifestyle that we call entrepreneurship. They signed up for a 9 to 5 job and dedicated nearly a third of their time for stability, consistency, and a paycheck for the work they delivered. Our job as an entrepreneur and leader is to protect them during this time of crisis.

How many months will you last? 1 month? 3 months? Through the end of the year? The amount of time you have, will determine your financial strategy of navigating through this COVID-19 pandemic.

Step 3. Let’s Build a Cash Forecast

Forecast is not a budget. I hate budgets. Budgets are a lame excuse to spend money, we always make money on a budget, and it is too many business consultants’ or CFO’s  “feel good” tool to “play business” and think that they are adding value.

A forecast is the simpler, cleaner, and faster cousin of budgets. Take your assumptions (hint: from your various departments, not from accounting) and plug in what you know. Keep it simple and only the absolute essentials. In this case, your revenue model, assumptions, and the various expenses and items we are going to talk about below.

A cash forecast should be put together relatively quickly, help you understand where you are going (think a GPS for business,) then allow you to look back up into the horizon and run your business. Don’t get too caught up with it; after all, you wouldn’t drive your car staring at your Waze App on the Phone. So you shouldn’t do the same with your business.

Get a light version of a forecasting worksheet here.

Keep this forecast around and have your controller or CFO update it on a weekly basis. We normally recommend updating our cash flow forecast on a monthly basis; but during this time of crisis, I’d push for weekly review as things tend to change relatively quickly.

Bonus Tip: Pull Out Your Line of Credit

If you have a line of credit with your bank, pull it out now because as banks get squeezed (and they will) – they might take that away from you. You are better off holding on to that cash during this time of uncertainty and add it to your war chest.

Let’s Work on Revenue

Sales (revenue) will solve a lot of your problems. This statement remains accurate during this time of crisis, so let’s take a peek:

What Type of Revenue is Going Away?

If you have multiple revenue streams for your business, right now is the perfect time to take a look at it and understand their differences. Are all of your revenue going away or just a portion of it? Why?

An example from a consulting firm client of mine. He has two main revenue type – workshop revenue (requires people gathering in a confined space, group 1) and consulting revenue (currently being done on-site in a one-on-one format with the CEO and management group of the company, group 3.)

In this example, our workshop revenue is completely shot and projected income for the next 2 months is readjusted to 0. Consulting revenue projection is readjusted to 80% then 50% as we know people will start canceling their engagement as they feel the effects of the upcoming cash crunch (even though they shouldn’t because good management consulting and clear financial insight is what will help them navigate these turbulent times; but, we can’t count on winning that argument during our planning.)

What Type of Revenue is Available?

We’ve mentioned that consulting revenue, while being at risk, is still available. So we look at ways to push harder at that – letting our clients know that this, of all times, is the time that they need us most. We provided tremendous value and support to our clients by letting them know that we are not just thinking about them, we are working tirelessly to research and find solutions that’ll help them navigate this.

In addition, we enlisted the help of our sales team, marketing team, and production team to try and see if any opportunities existed.

In this case with the consulting firm, we are able to begin working on the modification of our traditional workshop revenue and start moving the content to an online course format. We are planning on launching that by the end of April to try and recapture some of those lost revenue.

In other industries, we have also found opportunities that were geographically based where we shifted a lot of the loss revenue in Europe and US to countries in Asia who have handled this pandemic/lockdown a lot better than we have in the US – pulling their experiences from dealing with SARS some 17-years ago.

Let’s Talk to Our Employees About Payroll

Remember how I said earlier that it is our job to protect our employees as leaders of our businesses? Here’s where we have the heart to heart with them.

If you are a service-based business like a marketing agency, a consulting firm, or a law firm – my guess is that your labor costs are anywhere from 40 to 60 percent of your total revenue. This is your biggest expense and you will be foolish to not tackle this.

Openness and transparency will be my recommendation. An advantage of small businesses like ours is that our employees are a lot more loyal and family-like compared to our bigger competitors. As most of our accounting and CFO clients already employee a varying degree of open-book management, it is easy for us to take the numbers to them.

We shared the negative impact that the COVID-19 pandemic had on our business along with our plan of action. We shared clear numbers and projects and reassured them that we are doing everything we can to thrive our of this situation. We showed the team where they fit in and gave them the choice of how they want to move forward.

We were surprised and touched with some of the responses we received. Quite a few executives forego their pay all together and delayed their bonuses. One executive even held off on submitting his reimbursements for future trade shows that were moved or canceled but weren’t refunded yet. We had employees who volunteered the portion of cash for their payroll for other employees who “needed it more than they do.” Some opted to take staycation or reduce their hours while focusing more on their family.

Be open, transparent, and honest with your employees. You might be surprised at what solution they come up with to back you. Build the assumptions you find here into your cash flow forecasting model.

Let’s Find Some Cash in Expenses

DeepSky clients are familiar with the 5 primary categories of business expenses:

  1. Administrative Payroll
  2. Payroll Taxes and Benefits
  3. Marketing, Travel, and Entertainment
  4. Facilities Rent and Office
  5. Professional Services and Other Expenses

(We’ve covered 1 and 2 in our previous sections.)

If you want to try and find some cash, I’d also split up my expenses with by the “type of vendors” as follow:

  1. Banks (too big to fail guys with lots of muscle to flex here)
  2. Large vendors (Fortune 1000 companies, the big boys who’ve got more cash on hand or available than us)
  3. Other entrepreneurs (my mentor will call us “popsicle stands” with as much love as he means; but honestly, we are small and scrappy compared to the Verizon of the world)
  4. Our employees (we’ve covered these volks in the previous section)

These categories and classifications will help us ask for money and find cash in our business.

Credit Card, Banks, and Other Too Big To Fail Guys

Let’s face it, no one is coming to bail us out in this shit storm of a pandemic. We’ve only got our teams and each other (entrepreneurs unite) to get through this. So I’ll start by asking my biggest creditors for assistance.

American Express, Chase, Wells Fargo, Bank of America all have been extremely nice at giving us extensions on our credit card bills. The standard we are currently seeing is that, depending on your credit history, many are willing to forgive 30 days worth on interest and penalties. I’ll take any days I can get. Free money!

Travel and Events

With the hold on travel recommendation and cancelation of most events (please comply to help curb the spread of this disease! It’s no joke,) a lot of us have prepurchased tickets that are not being refunded. Unfortunately, event planners are doing everything they can (reschedule or something else) to avoid refunding the cash. That is because most of them have already spent it with their vendors and now face the same cash problem. With the events canceled, they are not getting the additional cash inflow they need to turn their business machine. The only thing we can do here is to dedicate a resource to call to try and get that money back. We have also enlisted the help of credit card companies and attorneys to help us better understand the laws around this.

Rent

Prior to the COVID-19 crisis, I had no idea rent abatement was a thing. There are already many cities that issued policies or recommendations that landlords are not allowed to evict their tenants. As such, landlords are more than willing to work with you on surviving these tough times together. I’ve seen full rent abatements for up to 2 months, 50% rent due with terms for the rest split over the rest of the year, etc. Again, we are all in this together, so if you are nice and courteous about it – people are all willing to help.

Be kind and thankful though. On the other side of this equation might be another entrepreneur just like yourself who is also getting hit hard. We have a handful of real estate clients who are on the other end of this equation; and while we do our best to accommodate and help, know that real estate companies have employees and families to look after too.

Large Utilities Vendors

We’ve found mixed results when we asked our telephone companies for help. T-mobile came through for us and a few of our outsourced accounting clients and gave us a 30 day grace period to pay our bills. So big shout outs to them. Thank you.

Other Expenses

Time to review your expenses and start a little bit of penny-pinching. Do you really need that cool SaaS that’s got that better interface? Do you have subscriptions that you’ve forgotten about? Ask your controller or accountant to provide you with a list of expenses in these miscellaneous type accounts and go through them one-by-one and cross out anything that’s not absolutely necessary. Shouldn’t take you more than 30 minutes to do.

Coming Out of This Cash Flow Crunch Better and Stronger

The economic effects of COVID-19 (so far) is really a hiccup in the flow of money through our financial system. Now, it might be a huge hiccup, but a hiccup nonetheless.

I always relate it to a traffic jam caused by the chicken that crossed the road. The first car breaks a little, then the second car, then the third. Pretty soon we have a traffic jam and when you are that 608th car that crosses the spot where the chicken crossed the road and saw nothing – you are wondering “what the f was all that about?” Think of COVID-19 as that chicken. Its economic effect will last long after the disease itself has passed, and we don’t even know how long that will take.

So here are a few things that’ll help us thrive out of it.

Always Have a Strong Accounting / Financial System

Most of DeepSky’s outsourced CFO / outsourced accounting clients were able to gain clarity in their business relatively quickly when the COVID-19 pandemic hit. We’ve always relied on a strong financial system of consistent reporting rhythm to provide us insight into the business operations. This allowed most CEOs to navigate the pandemic crisis with confidence instead of panicking and making rushed decisions.

If you don’t yet have an accounting and financial reporting system like this, this is a good time to build it starting with the tips in this article.

If you do, please trust it to work as designed. The biggest struggle during a crisis is dealing with fear and panic. You might be inclined to act on your fight or flight instinct and bark down special orders to modify the system or, worse, get rid of what was already in place. This actually interferes with the rhythm of things and creates unnecessary tension and stress that will open more risks of mistakes or poor decisions.

Remember, we need the leaders to be informed and driving the company, not panicking and struggling to stay afloat, dragging down anything that they can get their hands on as they sink to the bottom of the ocean.

Cash Up Front

One of our best client was quick to take ownership of his mistake during this pandemic. “I’ve done this [entreprenuership] for 20 years, Michael, and I still made the mistake of not gearing my business to take cash upfront,” he said on our very first emergency call last week, “I need to own up to it, learn from it, so let’s talk how we are going to make this better.”

This coming from the man who has sold his last business for high 8-figures and turned the business he just bought from a net loss to a 400% net profit increase year over year.

Like we’ve mentioned at the beginning of this article; cash, revenue, and profit are not the same. The primary difference is that cash and cash flow factors time into your accounting. It illustrates the movement of your money and the time needed to move through your system. That’s why cash conversion cycles (the lower the better) is such an important business metric to understand and optimize.

How long does it take to convert your $1 in sales into cash? The shorter the number of days, the better; and the cash upfront model is the only model that makes this key metric negative. I’m sure we’ve written and talked about this plenty in the past so I’ll try to find them and link the resources here.

Be Kind and Pay People Back Soon as You Can

We’ve offered some tips on shifting or boosting your revenue streams. We’ve offered tools and guidance to help you understand your cash flow and navigate your business through these troubled times.

We’ve also shared some tips on cost cutting and delay in payments. We just ask that you remember that 80% of the financial issues we are seeing now from this pandemic is the squeeze of cash flow due to either revenue loss or delay in payments from customers. Remember that on the other end of all these delays and interests forgiveness we are asking for is another human being just like ourselves. They have family, company, and people to look after too. As soon as you are able, please keep the cash moving through the economy, it’ll help us spin this giant business machine (the economy) back up.

Be thankful, be kind, and remember that, together, we’ll get through this better and stronger.

We are entrepreneurs. We solve problems and we make the world a better place.

#pushfuckingforward

#entrepreneurlife

  

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