Navigating the Financial Corona Storm – PPP is Gone What Now?

Matthew Saltzman, Partner and Director, Strategic Advisory Services

Last month we discussed the impact of Covid-19 pandemic at a high level and set the stage for the questions you should be asking yourself as you begin to return to the new normal that will be our pre-vaccine lives. This month we will begin to provide insight into the answers to those questions and hopefully give you a framework from which you can start to move forward again.

These past few months have been an exercise in treading water for most people. We seem to be focusing on keeping things afloat with a lot of energy, motion, and new behaviors. This is our model in the hope that when things return to “normal” we will be ready and prepared to run. Many of our clients are in buildings that have never been cleaner, more organized, and less cluttered. The downtime has been spent assigning these “clean up” tasks to employees who suddenly have a lot of time on their hands and could not be furloughed due to the PPP money. Others like ourselves have spent the downtime working diligently on the business rather than at the business setting a strong foundation for the future strategically. There is also a good number (other than grocery stores and other COVID advantaged businesses) that have done neither of these tasks and unfortunately will be among the most at risk when things open back up.

The first question all businesses need to ask themselves as we come to the initial P-Day of June 15 (about when the initial 8-week period for first PPP distributions strike) is what do I do now? Invariably the business cycle will not have picked up that dramatically in another few weeks. There are too many other businesses in the supply and distribution chain that are not quite there yet. The demand side destruction is still unquantified. The money received from PPP no longer counts employment and other costs as qualifiers for forgiveness once the 8-week mark is passed. The employees that were not furloughed are still drawing paychecks and right-sizing is staring you right in the face. For manufacturers, the physical spacing issues are problematic as is the requirement to build inventory with a weakened supply chain and unknown demand on the other side. To address this complex set of issues we have looked at staggering shifts to keep employment full and production on track. Workers that were on first shift may now find themselves on second shift even though both shifts are running at a 50% lower labor load than is traditional due to spacing requirements. Inventory build has to be watched carefully due to issues with aging inventory and potential obsolescence build.

AP may be aged much more than before the shutdown and AR is certainly less. The ability to generate new AR to recover the ratio is going to be tricky because of the considerations above. Cash flow will certainly be much lower in the coming weeks due to the lack of shipments and invoicing the past 10 weeks. You want to be sensitive to those whose AR has aged during the past 10 weeks as customer retention is key and there is always the risk of straining relationships when trying to collect from a struggling customer. A strong cash flow model that takes into account aging and pay cycles, accounts for realistic timelines in collection, reflects accurately the current production and AR creation forward, and understands the must pay, should pay, would like to pay, can wait to pay categories is critical. Strong controls on cash expenditures and liability creation are critical to establish and should be a priority of the highest order.

With that, there will be a couple of key metrics that you need to have a handle on in order to address the issues above. Current expenses need to be boiled down to the absolutes as for the foreseeable future cash will be king. Do not be fooled by a current cash position that seems larger than normal. It will evaporate faster than you recognize due to the lack of inflow that normally replenishes. The PPP which hopefully you have segregated will no longer count toward forgiveness and anything that wasn’t used during the 8 weeks is now a bona fide loan and liability. Deferred rents and other payments are still liabilities and need to be accounted for in future cash flow projections.

Finally, when looking at what you will produce going forward remember not all revenues are good revenues. It is critical that you account for the true cost of each service or SKU that you produce. This means that labor, overhead, and other indirect costs need to be accounted for as you don’t want to try to recover on sales of high volume, high labor and low to no margin goods and services. You need to collect your AR as you are not a bank, spend tightly, produce intelligently, and manage your labor and supply chain very tightly. In the final analysis, this is and has been an opportunity to reevaluate your entire business model and you should take advantage of it to create a sustainable business that can be relevant in the new economy and thrive in the future.  

We are experts in creating and managing the modeling tools discussed above, have been navigating these difficult waters and situations for over 30 years, and can help you do the same. Call or contact us to see how we can help you or to answer any questions you might have. We are here to help all you need to do is reach out.