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Posted by Chrissy Hammond on Tue, Mar 31, 2020 @ 04:42 PM

Cash Flow - LiquidityCOVID-19 will impact all businesses. The question is how great the impact will be. This will greatly depend on your industry. However, you do have some control – mitigation strategies you implement now can greatly diminish the extent of impact on your business. This situation may go on for months, and from a risk mitigation and planning standpoint it makes sense to plan for that possibility. 

As the saying goes, “Cash is King.” Liquidity management is a set of ongoing strategies and processes that ensure your business is able to access cash to meet short-term obligations, such as to pay for goods and services and make payroll. During these volatile, rapidly evolving times, a liquidity plan is a life raft for survival.

Obviously, the best time to make a plan is before you need one. However, regardless of whether you have actively planned for a time such as this, you can still make changes that can make a positive difference.

The starting point is understanding how much liquidity is available to you and how long you can operate with that liquidity under various operating assumptions.

Here are some questions to ask & steps to take:

  • How much cash runway do we have based on available cash and financing and best and worst estimates of business disruption?
  • Where is our cash?
    • Consider the implications of cash management agreements and rights of setoff
  • Can we accelerate cash collections and delay payments to lengthen the runway
    • Set up A/R and A/P triage teams
      • A/R – Your operating cycle starts when you begin spending money to work on a project. The cycle ends the moment you receive your payment. Limiting the time between these points is essential. If you wait weeks to send your invoices, it will stagger your profits and hurt your cash flow. 
      • Form a committee that meets weekly to review aging and resolve issues
      • Get bills out more quickly
      • Identify low-hanging fruit in receivables
      • Identify people to make calls on more challenging collections
      • Fix any administrative issues such as billing errors or documentation deficiencies that are slowing down collections; resolve any customer disputes
      • Is it worth giving incentives to customers to pay?
    • A/P – Form a small committee that meets at least weekly to review all A/P and check runs
      • Prioritize only those payments that are critical
      • Identify any unnecessary spending and shut it down
      • Evaluate all capex spending for necessity and stop anything that is not revenue and cash generating now
  • Can we liquidate inventory or sell non-essential or unproductive assets or equipment?
  • Can we lease/rent any excess equipment we have to third parties?
  • Have we looked hard enough at our business and products to determine if we can eliminate any that are not generating sufficient profitability and cash flow?
    • Have we looked at all fixed and variable costs and made appropriate reductions?
    • Examine every line in your budget and think about the impact of every dollar spent; this should be done repeatedly
    • Set rules to restrict any unnecessary spending
    • Prepare a reforecast that has multiple sensitivities for various durations of interruption and even recovery
    • Evaluate supply chain disruptions and the impact on the projections
  • Is it time to speak with our lenders or stakeholders to discuss how much short-term liquidity we have and how much we will need under various scenarios?
    • Draw down on any available revolver capacity
    • Banks are being very flexible on restructuring debt as mandated by the Fed. You may be able to acquire great terms for adjustments to agreements:
      • Renegotiating restrictive covenants and other potential breaches
      • Deferring payments and extending maturity
    • Small business loans
      • If under 500 employees, the SBA administration offers the 7(a) loans through banks, and the Economic Injury Disaster Loans are available directly through the SBA
    • Federal programs and loans directly from the Federal Reserve with some strings attached for those over 500 employees. Alternative sources of financing will have to be explored first
    • See what other options are available to increase liquidity
    • Is capital available from the sponsor?
    • Is some contract relief available with existing suppliers? Everyone is suffering, but communicating and collaborating with stakeholders will be better for them than if you shut down completely.
  • What other options to create liquidity exist?
    • Can we temporarily furlough employees?
    • Can we reduce salaries among all employees to keep people working through the crisis but share the pain and extend liquidity?
    • Can we defer retirement plan contributions?
      • Can we defer rent on our properties by working with our landlords? Remember they need you, too
      • Ask for a rent holiday and add it to the back of the lease term
  • Are there other sources of cash that can be accessed?
    • Delay tax payments as much as possible with the CARES Act and previously announced extensions
    • Business interruption insurance
      • This can take time and data; most will not be covered but worth a look
      • Evaluate whether you have coverage
      • Speak with your broker and get the process started

Implementing a Successful Liquidity Management Plan

Senior-level support, typically from the CEO or CFO or both, is critical to help hold people accountable and achieve success. Making this project a team effort with a designated leader to set targets and Key Performance Indicators (KPIs) and to measure results is also essential, as the constant focus will drive results. KPIs do not need to be complex. Days sales outstanding, days payable outstanding and days inventory outstanding are simple but effective tools. Develop management reports and dashboards to track and monitor compliance across the company, both laterally and horizontally to ensure effort and focus remain consistent.

Depending on the size of your company, you may want to establish teams by division or region. Regardless of size and scope, however, leadership should institute a comprehensive, end-to-end review of operations. An initial analysis and baseline of this data will help your team ensure that the information continues to be accurate and that real-time remedies can be initiated as needed.

Like any other initiative, effective and robust communication from the top is critical. Ensure every team and area leader has a full understanding of the scope and scale of imminent changes, as well as their areas of responsibility. Make sure that all truly understand the meaning of "working capital" and their roles and responsibilities around it. Quantify the financial benefits of achieving your targets so that all employees can understand how they contribute to the overall goal.

Looking for more COVID-19 resources? Visit our resource center for expertise on impacts to expect and how your business can respond.




Copyright © 2020 CBIZ & MHM (Mayer Hoffman McCann P.C.). All rights reserved. CBIZ and MHM are separate and independent legal entities that work together to serve clients. CBIZ is a leading provider of tax and consulting services. MHM is an independent CPA firm providing audit and other attest services. This article is protected by U.S. and international copyright laws and treaties. Use of the material contained herein without the express written consent of the firms is prohibited by law. Material contained in this alert is informational and promotional in nature and not intended to be specific financial, tax or consulting advice. Readers are advised to seek professional consultation regarding circumstances affecting their business.

Tags: liquidity, COVID19, Coronavirus, liquidity management

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