Protecting Viability for the Balance of 2020

Most companies are currently either shutdown or operating on a very limited basis. Once business is restarted, demand for product or service is unknown, the ability for suppliers to provide timely product is a question mark and will all the employees return? In other words, there are a mountain of risks and the question for the CEO / business owner / management team is “What should I be doing to avoid catastrophe and protect business viability?”

Recognize that every business needs to help itself and ensure that its own house is stable from its foundation. Nobody will show up on their doorstep with a money bag to get the business back to prosperity. Change is the order of the day and there are no quick fixes or pain free solutions. A plan is vital and every team member needs to be on the same page and communication will need to flow both up and down the organization. The short term and mid-term goal for the balance of calendar year 2020 is to dig in, survive and remain viable.

1. Prepare a weekly cash flow plan for the remainder of the year. Cash is the oxygen for every business and it must be protected. Identify the first and second 90-day periods as your goalposts. Focus on the initial 90 days with the second 90 days as more of a placeholder. The forecast will be a fluid working model with changes occurring daily. This will be especially true early in the process when identifying shipments and collection timing from customers. Constant communication with customers will be necessary as they estimate and adjust their build schedules and payment timing. It is important to focus and collect accounts receivable identified as ineligible on your borrowing base to maximize line of credit availability. Secured debt payment amounts and maturity dates will be critical identifiers and will require strategic planning.  Assuming the credit facility includes a line of credit, then the analysis should also include a weekly forecasted line of credit and borrowing availability supported by forecasted collateral (likely accounts receivable and inventory). This data will provide stakeholders with an understanding of the entities “dry powder”.  Loan covenants should also be calculated either monthly or quarterly as determined by the credit agreement. 
2. Vendor / Accounts Payable Management. Identify critical and non-critical vendors. The goal is to obtain product to meet customer requirements while conserving cash-payouts. Inventory cycle counts may be required initially to confirm beginning inventory levels. If production will fall short of build schedules, communicate the planned shipments to customers. The accounts payable goal is to push out every vendor 2-4 weeks from historical payment terms or at a minimum, match collection timing to payments. Daily meetings between production, payables and treasury will be necessary for this balancing act.
3. Reduce your break- even. Within a relevant range of time, there are variable costs, semi-variable and fixed costs. In the long run however, all costs are variable and all cost reductions should currently be “on the table”. Remember, the goal is to ensure viability for the remainder of the year and get the company to a better place by Q1 2021. Therefore, stringent cost reductions today can be slowly reversed in 2021. I suspect most companies have spoken with their lenders and landlords regarding three (3) months moratorium on payments. If not, they’re behind the curve and need to get those in place. Capital expenditures and tooling payments should be placed on hold until a specific funding source can be identified. Any projects that are loss-leaders will require price relief from customers. RIFs (Reductions in force) may or may not be required depending upon sales volumes and the number of employees brought back. Payroll reductions should be initiated in the C-suite and rolled out to other administrative areas. It is a natural thought process to avoid cutting too deep, but as a practical matter, it rarely happens.   
4. Access to New Capital. Typically not a quick solution but having said that, many borrowers have requested and received payment relief on their existing P&I payments. There may be opportunities with the existing banker especially if additional collateral and higher personal guaranties are available. However, even that will not be a slam dunk for those companies that are pushing the limits on their leverage covenant and FCCR (Fixed charge coverage ratio). There may be an opportunity to refinance or finance additional M&E by bringing in a non-bank lender. Their cost of capital is higher than your traditional bank, which means interest rates will increase. However, it can be short-sighted to simply compare the interest rate from the bank to the rates charged by the non-bank lender. You really need to measure the cost of the new rates to the cost of not having the extra liquidity provided by the non-bank lender. In addition, the non-bank lender may offer more flexibility in the credit structure. While most non-bank lenders would prefer to finance the line of credit, there are non-bank lenders that will allow your bank to provide the line of credit and they will step in to finance the equipment and real estate. While overall borrowing costs will increase, this approach helps to blend the cost of capital. While non-bank lenders are an opportunity for additional capital, we’ll need to exercise caution and patience to determine their appetites as we move through 2020. Factors influencing their deal flow will include uncertainty related to forced liquidation values, orderly liquidation values and the underlying supply and demand for the various asset classes.
5. Get outside help from professionals. This is a time to achieve actionable results in a very short window, as well as to manage the day to day details. Management will be experienced in their industry, but it’s highly unlikely they have the skill set required for current conditions. Hire an attorney and a financial advisor, both of whom should be skilled at workouts and restructuring to help you navigate the challenges. The alternatives to a viable situation include a) Chapter 11 and 7 bankruptcy b) Business winddown or c) Sale of the business. However, any of these alternatives risks 1) impairment (less than 100% recovery) to the secured lender 2) An eventual draw on the personal guaranties and 3) Will very likely net $0 to the shareholders. In other words, management and their professionals can address the viability issues now and protect value, or another painful process will fix it for them with undesirable results.
6. Communicate. Communicate progress to your stakeholders. Outside advisors should assist or lead communications to stakeholders as they are often skilled at providing a bridge of the economic facts and providing calm to a difficult situation. This is especially true when communicating with lenders.  For example, experience shows that outside of someone’s birthday, bankers do not like surprises.

Summary

As the economy re-opens, what should companies be doing to protect their viability and avoid catastrophe going forward? First and foremost, recognize there are no quick fixes or pain free solutions. The effort will come from within and there will not be a bag full of cash on the doorstep to ease the burden. Liquidity is the oxygen for any business so it must be protected. Prepare a weekly projected cash flow and line of credit availability for the balance of the year and eliminate all non-essential spending. Recognize that secured debt maturity dates, their required payment amounts and unsecured debt payments will require strategic planning. Do not underestimate the critical process of managing the creditor base. Reduce the break-even level for the company and defer all capital expenditures and tooling payments until a specific funding source is identified for them. Non-bank lenders may be a new capital source, but a thoughtful and documented business plan will be required. Obtain help from outside professionals with restructuring and workout experience. The window to protect and achieve viability is a short one and the alternatives including bankruptcy, winddown or a company sale will likely be detrimental to both secured creditors and shareholders.

About the Author

Michael Boudreau CPA, CTP CFF is a Director with Morris-Anderson, a financial consulting firm focused on restructuring and workouts, court appointed receiverships, debt refinancing, performance improvement, CRO and interim management, transaction advisory and other fiduciary services. Mr. Boudreau has operated and sold numerous business enterprises as court appointed receiver. Examples include manufacturing operations, senior living facility and real estate developments. He has 25+ years’ experience in the automotive supply chain as Financial Advisor, CFO and Treasurer. Mr. Boudreau also has extensive experience in numerous Commercial & Industrial (C&I) as well as real estate matters. Examples include health care, construction and contractors, aerospace, restaurant chains, plastics, agribusiness, consumer products, logistics and others