Due to COVID-19 and its effects on the economy, a major concern for all businesses is liquidity.  Preserving cash flow should be a focus for business owners, whether they are temporarily closed for business or operating at reduced capacity.

The ever-evolving fall-out from the COVID-19 crisis will continue to impact all organizations, but it’s difficult to predict what the new normal will look like on the other side of the pandemic.  The business disruption experienced by so many organizations continues to affect cash flow, the lifeblood of companies, particularly during crisis.  Absent a crystal ball to indicate a true end to the COVID-19 health concerns and related government interventions, now is the time to analyze and evaluate your approach to managing cash flows.

Businesses that received funding from the Paycheck Protection Program, need to focus for an eight-week period, on the payroll costs and other expenditures allowed under the program.  The 13-week cash flow analysis is a natural extension of that process. Although each business is unique, the typical cash cycle for small businesses tends to track over one calendar quarter, or a 13-week period.  And that’s where the 13-week cash flow model helps you navigate the challenges ahead.

The concept of a 13-week cash flow forecast is practical and straight-forward.  It serves to assist the business owner with understanding the anticipated sources and uses of all funds over the next 90 days.  If carefully crafted, the 13-week cash flow projection can be used as a guidebook to operate the business over the short-term and might also be helpful to lenders interested in tracking their collateral positions on an on-going basis.

When developing an accurate 13-week cash flow projection, the devil is in the details.  It is critical that business owners understand their specific sales cycle and how it has changed, along with their current sales backlog and pipeline.  It is also important to understand your customers, especially large customers with longer or less favorable payment terms and those with poor payment histories, as these nuances can have a drastic effect on the timing of a company’s cash collections.  Using this information, develop a sales projection and forecast accounts receivable (A/R) collections over the 13-week period.  However, be sure to consider the impacts of COVID-19 on current receivables because A/R are likely to be your largest source of cash from the business and historical collection trends may no longer track in the new environment.  Also consider other sources of cash that may be available, including less obvious assets like cash surrender value from key person life insurance policies or the sale of obsolete inventory.

After identifying the sources of cash available over the next 90 days, begin to think about the operational cash needs over that corresponding time period. Businesses that had to shut down need to develop realistic assumptions for a possible re-opening if it is likely to occur in the following 13 weeks.  Will there be additional costs due to employees not returning and new hires to be trained? Have you implemented new business lines, or temporary processes that you may want to continue or discontinue post re-opening?  Certain discounts such as free shipping for supplies may no longer be offered and need to be considered in the cash flow model. Also include any additional costs for cleaning supplies, face masks, etc. to comply with updated health and social distancing guidelines.

In addition to turning your attention to the company’s aged accounts payable (A/P), determine whether there are recurring expenses outside of A/P that should be captured such as bi-weekly payroll, interest payments to lenders, etc.  When evaluating A/P associated with your largest vendors, identify those deemed to be “critical” and think through whether certain payments can be delayed and who from your organization is in the best position to negotiate revised payment terms on behalf of the company.  Maintaining solid vendor relationships is crucial to meeting the demands of your customers and managing through this crisis.

Once all sources and uses of funds have been projected over the next 13 weeks, review your expected cash balance at the end of each week to assess whether cash balances are positive or negative. If cash balances are positive, re-evaluate your assumptions (with a focus on sales and A/R projections) to confirm the inputs and outputs are reasonable under the circumstances.  If negative cash balances are evident over the next 13 weeks, the organization should consider borrowing options, reducing or eliminating non-critical expenses.  If you operate a business impacted by seasonality, take note of whether any short-term cash gaps identified in your 13-week cash flow model are likely to be remedied during future peak periods.

Your 13-week cash flow forecast should be updated weekly and all assumptions should be documented accordingly.  However, be sure to document the actual results in a separate column and analyze the budgeted forecast to actual results.

A realistic 13-week cash flow projection (monitored on a weekly basis) will help a business owner address short-term cash flow needs, manage funding challenges and negotiate effectively with vendors and creditors.  Mercadien’s COVID-19 Task Force, which includes members of the firm’s bankruptcy and insolvency practice is available to assist you in evaluating your budget and cash flow needs, and stands ready to work with you as an advisor and sounding board to help you navigate your way through the upcoming months.  Complete the COVID-19 Assistance Request form on our website or contact Frank Pina, CPA at fpina@mercadien.com or 609-689-2319 to get started.

DISCLAIMER: This advisory resource is for general information purposes only. It does not constitute business or tax advice, and may not be used and relied upon as a substitute for business or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified accountant, tax practitioner or attorney licensed to practice in the jurisdiction where that advice is sought.