Top 5 Questions About Business Continuity for Middle Market Companies & PE Firms

This 5 in 5 Series release poses five questions to SolomonEdwards’ Transaction & Regulatory Advisory Services team about the challenges our clients face in the wake of COVID-19.

1) It’s hard to know which levers to pull in a chaotic environment like this one. How do we develop our business continuity strategy?

Most companies have taken measures to protect employees by transitioning to a remote work environment. With every passing day the reality that the impact of the Coronavirus pandemic may be something other than a temporary inconvenience is beginning to sink in. As companies emerge from efforts to close the March books, financial forecasts are indicating that a different kind of approach may be necessary to survive this crisis. What could be a prolonged economic downturn in its wake may continue in the current year and even beyond.

There’s no shortage of potentially good ideas on the table for companies to choose from as they develop their COVID-19 survival plan. With the uncertainty that accompanies a crisis of this nature, it’s difficult to know which of the ideas to act upon. This is where priority setting is essential. We recommend that our clients take a long-term view to this crisis and assume that it will continue to impact business at least through the end of the calendar year with ongoing impacts into 2021. Although growth may have been the goal in 2020, a realistic re-calibration of expectations is the key to navigating this situation.

2) How do we put our corporate COVID survival strategy into action?

Focus on your balance sheet and identify the risks and opportunities that it holds for your survival strategy. Maximizing working capital is a function of ensuring the collection of receivables while managing the timing of payables. In a critical time like this, be sure to allocate dedicated time and effort (i.e. human resources) to managing your cash and working capital. Working capital management is a dynamic process and in a time of crisis it becomes even more susceptible to constantly changing variables from outside forces that are likely to be beyond your control. To compensate for the rapid change and lack of control of the myriad of factors that impact your working capital, it is critical that you employ a proactive approach to obtaining input from the external stakeholders like customers, vendors, investors and lenders that are party to the continuity of your business operations.

Next, consider longer term sources and uses of cash that may be needed to span the duration of a long-term period of uncertainty. New opportunities for relief are now available under the recently enacted Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. Taking the time to evaluate all potentially available means of financing your company’s operations during this challenging year is critical.

3) What steps should we be taking with our customers to ensure we will be paid and to avoid loss of revenue?

Accelerating cash collection from customers is not going to happen at this time. However, there are practical steps that you can take to preserve the cash flow housed in your customer accounts receivable that will also serve you well in executing your survival strategy.

With respect to accounts receivable collection, it’s likely that your larger accounts receivable sit with your best and most important customers. For many middle market companies a majority of their revenues are generated from sales to a fairly finite number of customers. We recommend that you analyze your customer list and force rank them in order of importance to the sustainability of your own business.

Proactively engage these top ranked customers as they are likely to not only hold the key to short term working capital preservation but learning about whether they plan to continue to purchase your products and services during this crisis is an essential data point in your survival strategy. To the best of your ability try to gain an understanding of how these key customers plan to weather the storm as this will help inform your own scenario modeling. Don’t just assume that your best customers under normal conditions will continue as such during the pandemic.

Also, accomplishing this objective is likely to require a different communication approach with your customers. Broader communications from C-Suite to C-Suite are likely going to be required to gain insight into your top customers’ business continuity strategies. Again, the key here is being proactive. Actively engaging your customers during this difficult time not only informs your COVID survival plan, but it will also serve to strengthen your relationship with your key clients in the longer term.

While it’s tempting to increase efforts to recover cash from those customers that were already slow payers before the crisis, it is not likely that time invested in hounding these customers will yield any long-term benefit. Realistically, slow paying customers are not likely to either increase their purchasing volume or accelerate their payment timing in crisis of this nature. The approach with slow paying customers should be cash preservation, not acceleration. However, be sure to “parking lot” the pain you might be feeling in having cash held up in slow-to-recover or potentially uncollectable customer accounts receivable. That pain will be an important motivator for enhancing your billing and collection processes after the crisis passes. For now your strategy must prioritize survival over process improvement.

4) What are best practices when it comes to managing our costs and vendor relationships?

As far as managing vendors goes, we also recommend that you conduct a similar forced ranking of your vendors as a clear understanding of those vendors that are most critical to your business continuity will inform your ability to set priorities for your working capital management strategy. Moreover, ranking your vendors also provides you with a road map for considering potential cost savings through reducing activity with low priority vendors first.

This crisis also yields new challenges as entire industries are all being squeezed at the same time.  On paper it might make sense to decrease volume or delay payments to a vendor – but if that vendor, while not critical today, is critical once your business returns to the new normal, will the vendor still be there if your industry peers are conducting the same reduction exercises?  This vendor assessment goes beyond the numbers and requires a holistic, qualitative assessment as to the long reaching impacts on your business and future revenues. Your assessment should include a contingency plan to procure goods and services that are critical to your business from alternative vendors should one of your key suppliers be unable to serve you for the duration of the crisis and post crisis fall out period.

Again, a critical component of managing cash outflows and cost reduction activities is communication with your vendors. It’s human nature to avoid delivering bad news, but by collaborating with your vendors, learning about their challenges and informing them of your survival strategy, you will be taking an essential step in ensuring your own sustainability. For example, the collapse of a player within your supply chain (even if that company is not a direct vendor to you) may result in the disruption of goods and services downstream that could serve to derail your survival plan.

This crisis is certain to have a ripple effect, the impact of which may not be felt until the third or even fourth quarter of 2020. Therefore, continual and proactive outreach to your customers, vendors and business partners must be the backbone of your COVID-19 crisis survival strategy.

5) How can we best prepare for longer-term sustainability if the crisis continues indefinitely?

Engaging both lenders and investors to discern potential sources of cash to support longer term sustainability must also be part of your survival plan. Even if those longer-term liquidity opportunities are not needed, it is critical to gain clarity now on your available options. Do plan for the worst and leverage the options available today.  Do not expect the best and assume the same options will be there tomorrow.  The current universe of options includes several programs that are part of the CARES Act. Some of those programs are described below.

The Paycheck Protection Program (“PPP”) is designed to help companies fund their payroll, facility rent, and other business critical costs during the pandemic. These loans are subsidized by the federal government and are generally available to any company in the United States with less than 500 employees (including full and part-time workers) or that meet certain alternative company size measures based on net worth and net income as defined by the Small Business Administration (“SBA”). Eligible companies can borrow up to 2.5 times their average monthly payroll costs or $10 million, whichever is lower, and may be forgivable entirely if certain requirements are met as outlined in the CARES Act. To apply for a PPP loan we recommend that you contact your current bank; however, companies can apply for this program through any bank, so applicants do not need to limit their application to only their existing banker.

In addition to the PPP, the CARES Act also provides an expanded opportunity for qualifying companies to obtain an Economic Injury Disaster Loan (“EIDL”) for up to $2 million to cover operating costs during the COVID-19 crisis. The SBA is also offering a six-month loan subsidy program for companies having difficulty covering their payments on existing or new SBA covered loans (ex. 7(a) loans). Finally, there are a variety of tax benefits created by the CARES Act that give companies the opportunity to take advantage of deferrals, deductions and credits this year that represent an additional source of cash flow. Investing an appropriate amount of time in researching the available relief programs provided under the CARES Act is time well spent. Some of the tax benefit programs have stipulations that limit an applicant’s eligibility if they utilize other provisions in the CARES Act like the PPP. Seeking the input of your accounting advisor, attorney and banker will also aid in your ability to evaluate the available options for longer term financing. A full list of Coronavirus relief options can be found on SBA.gov.

Contact SolomonEdwards today to help you develop and execute a comprehensive sustainability plan for your business.

Our Crisis Management Solutions team are experts at helping our clients execute critical accounting, finance and operational initiatives, particularly in today’s unprecedented time. We understand the wide range of complex variables to navigate and can provide the necessary resources and expertise to successfully manage and execute your survival strategy — all while mitigating the dynamic array of challenges created by the COVID-19 crisis. For more information, please contact John Moerman, Managing Partner, or Mike Fleming, Practice Leader.