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Corporate Resiliency: How to Ensure Financial Health Ahead of an Economic Downturn
As we all know, over the last few months, COVID-19 caused a shutdown of many aspects of the U.S. and world economies. While the Great Recession of 2008 was caused by factors that were more industry-specific, such as the subprime mortgage crisis, the economic downturn that is projected to come out of the shutdowns mandated due to COVID-19 is likely to be more wide-ranging in light of the non-discriminative impact of the virus. Even hospitals, which are on the frontlines of combating COVID-19, felt the impact as fewer patients came for non-emergencies and as elective surgeries were postponed. Given this outlook, now is a critical time for companies to reassess their business and finances so that they can be prepared for the future. Proper planning is key to ensuring a company's financial health when facing an economic downturn. Although companies will come into such planning with different levels of financial health, the same considerations can be helpful in determining the best path forward.
|Accounting for Existing Budgets and Projecting for the Future
A good starting point is the budget and plan you initially had for the year. We are already a number of months into the COVID-19 crisis, so consider: How have revenues changed since shutdowns and other governmental restrictions went into place? When are the locality's restrictions projected to end, and when will your business be able to get back to business? Although businesses may be opening back up, customers will likely not have the same spending habits as they once did. Are there ways that the business can transition to take into account the "new normal" that the world is settling into? Restaurants who primarily were sit-down restaurants have transitioned during this time to take-out and delivery services. Retailers whose locations were closed to customers have transitioned to curbside pick-up alternatives. Be creative with the solutions, but also be careful of solutions that have associated costs and expenses that may not be justified.
Additionally, consider preparing projections of your expectations for your business and particular industry over the next six to 12 months. These projections could have multiple variants, such as different timings for governmental restrictions to be lifted and likelihoods of additional restrictions in the future. They should also take into account historical trends for your industry in prior economic downturns. How customers responded and interacted with your business and industry during the Great Recession could be an indication of their response to the next economic downturn. If there are certain goods and services that your customers gravitate toward when they do not have as much disposable income, consider focusing the efforts of the company toward those goods and services. Having a good understanding of these issues and what they may mean for your business will provide a good foundation for revising the prior budget and plan for the year and considering what the company's next steps should be to implement the new budget and plan.
|Securing and Conserving Capital
In any economic crisis, "cash is king." Conserving cash and/or access to credit are key to ensuring that a company survives, and hopefully thrives, during an economic downturn. Any discretionary spending should be largely, if not entirely, restricted during the downturn. Capital expenditures that were budgeted and planned prior to the downturn should be reconsidered. What, if any, capital expenditures are critical to the continued operation of the business and/or are projected to have significant short-term value for the company? It may make sense to continue with any such critical expenditures, but to postpone all other capital expenditures.
Existing credit facilities should be reevaluated and potentially renegotiated. Is it possible for the company to get better credit terms, including lower interest rates, lower monthly payments, or extended maturity dates? Can the limits of existing lines of credit be increased? If the company has unencumbered assets and/or equity in its assets, consider whether it makes sense for the company to get new or additional financing. The goal here is not to get access to credit in order to immediately spend it, but instead to have the credit available as a safety net in the event that the company requires immediate access to funds during the downturn.
|Assessing Relationships, Budgets and Staffing
There may be other relationships that a company has that can also be renegotiated. Are there contractual relationships with vendors, landlords, customers or others that can be renegotiated to provide better terms for the company? Perhaps certain of the company's accounts payable can be stretched to longer payment terms. (Although this should be common sense, withholding taxes should not be considered an account payable that can be stretched!). On the other hand, keep track of accounts receivable and contact any customers who are not making their payments within the contractually-agreed time period. Avoid extending credit terms to customers beyond what is customary for the company and/or that particular relationship. Ensuring consistent payments on accounts receivable will help to support the primary goal of conserving cash.
Also consider whether there are any vendor relationships that are critical to the continued operation of the company. Is there a particular necessary part or raw material that the company only sources from one vendor? If so, maintain close communications with that vendor so that any disruption in supply is identified sooner rather than later. Also look into other sourcing options that can be utilized in the event of a supply disruption. The levels at which inventory are maintained when the economy is good may not make sense during an economic downturn. Based on the projections of customer demand, consider what inventory reductions make sense in the short-term until customer demand gets back to normal levels.
Marketing budgets often get cut when a company has to reduce its budget for the year. Although it is an easy line item to adjust, companies need to continue marketing during a downturn so that their name and business remains in the forefront of customers' minds. To that end, consider more cost-effective methods of marketing that the company may not already be taking advantage of. Social media is generally very affordable, if not free, and can be used to access a wide range of potential customers.
Although always a tough consideration, evaluate current staffing and whether changes need to be made to maximize value. If business has slowed down due to governmental restrictions or the economic downturn, staffing may not need to be maintained at current levels. On the other hand, if the company is exploring transitioning its goods and services to meet changing customer preferences, it may be possible to shift and retrain, if necessary, certain staff to focus on these new areas of the business.
|Transitioning After the Crisis
Finally, prepare a plan for transitioning out of the economic downturn. How can you capitalize on increased customer spending when that time comes? What opportunities are there for the business transitions made in response to the crisis to continue once the economy comes out of the downturn? Certain services provided prior to and discontinued during the downturn may not be worth reviving post-downturn, allowing other, more valuable services to take their place. Social distancing and remote working could have long-term effects on customer demand, so consider what steps the company can take now in order to be in a position to take advantage of any projected change in customer demand. Again, projections of different scenarios and paths forward can be helpful for this planning.
|Conclusion
If the COVID-19 crisis has taught the world anything, it is that we are not always in control like we think we are. Nevertheless, with proper planning, companies can regain some of that control by ensuring that they are in the best position possible to make it through the economic downturn.
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Derek F. Meek ([email protected]) is a partner, and Hanna Lahr ([email protected]) is an associate, in Burr & Forman LLP's Creditors' Rights & Bankruptcy group.
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