{"id":2228,"date":"2020-04-27T17:08:04","date_gmt":"2020-04-27T22:08:04","guid":{"rendered":"https:\/\/lqdfinance.com\/?post_type=insights&p=2228"},"modified":"2020-09-10T10:33:08","modified_gmt":"2020-09-10T15:33:08","slug":"navigating-covid-19","status":"publish","type":"insights","link":"https:\/\/lqdfinance.com\/insights\/navigating-covid-19\/","title":{"rendered":"Navigating COVID-19: A Guide for Small and Medium Sized Business Owners"},"content":{"rendered":"

Navigating COVID-19:<\/h2>\n

A Guide for Small and Medium-Sized Business Owners<\/h2>\n

The spread of COVID-19 and subsequent public policy decisions have created economic uncertainty and instability. These stresses \u2013 even if short-term \u2013 can nonetheless have a long-lasting negative effect on small businesses and even cause many small businesses to fail. To manage this volatility, small business owners need to implement proper strategic planning.<\/p>\n

How Your Business Might Be Affected<\/h2>\n

Small businesses will be affected by COVID-19 in the following ways:<\/strong><\/p>\n

    \n
  1. Disruption to your operations due to illness of staff or other parties<\/span><\/li>\n
  2. Disruption in your supply chain or the supply chain of your vendors resulting in an inability to procure inventory, parts, or supplies<\/span><\/li>\n
  3. Reduced revenues and operating losses as a result of reduced demand<\/span><\/li>\n
  4. Disruptions in collecting accounts receivable due to economic impact on your customers<\/span><\/li>\n
  5. Longer term negative business impact as a result of an economic downturn<\/span><\/li>\n<\/ol>\n

    While each business is unique, the following sections provide assessments all businesses should consider and guidance on implementing appropriate mitigation steps.<\/p>\n

    Initial Requirements and Steps<\/h2>\n

    Imagine that you are going to drive to an important meeting. You would begin by setting the intended route and assessing the drive time so you can leave with enough time to make the meeting. Now, let\u2019s say that there is a sudden accident that creates traffic delays.
    \nIf you left to the meeting without allowing for additional time this change to your plan may cause you to miss the meeting. Conversely, if you had never considered the drive time, then how would you know when to leave?<\/p>\n

    You cannot effectively manage the current situation or strategically run any business without a road map and timely and accurate data.<\/p>\n

    In times of uncertainty, this analysis will focus on cash flow and liquidity, which requires three things:<\/strong><\/p>\n

      \n
    1. A projection so you can plan for what you think is coming<\/span><\/li>\n
    2. Updated actual results on a weekly basis<\/span><\/li>\n
    3. A comparison of your actual results to your projection and a corresponding strategic decision<\/span><\/li>\n<\/ol>\n

      For purposes of this exercise, historical financials are not very important because we are focusing on forward-looking liquidity and cash flow. Regardless of the state of your bookkeeping, it is imperative to get reliable numbers on the few initial data points required , setup the projection model provided, and then, critically, allocate the time required to enter the relevant actual performance data on a daily or weekly basis.<\/em><\/p>\n

      \"\"<\/p>\n

      Take a Snapshot: Liquidity<\/h2>\n

      The single most important data point in a company\u2019s ability to effectively navigate volatility is its cash position relative to the cash required to fund operations under negative pressure over a period of time.<\/p>\n

      Liquidity is one measure of whether you will have the cash on hand to fund operations in the coming months. Liquidity is a snapshot of a company\u2019s ability to pay its short-term obligations based on current assets and current liabilities, and is often measured with the quick ratio:<\/strong><\/p>\n

      \"\"<\/p>\n

      The problem with the quick ratio is that it assumes all your accounts receivable (AR) and inventory can be liquidated at the value booked on the balance sheet. But if sales have decreased you may find yourself sitting on inventory unable to sell it, or only able to sell it for a loss. Or if your customers are having difficulties of their own, you may not collect your outstanding AR on time, or even not at all in some cases. Finally, the quick ratio does not consider the timing of cash flows, nor does it account for negative cash needs resulting from operating losses.<\/p>\n

      A better way to think about your actual liquidity is as follows:<\/strong><\/p>\n

      \"\"<\/p>\n

      Operating losses are not typically included in this analysis and from an accounting perspective; but this is about planning for cash flow, not accounting. If you are going to lose $20k per month for six months, then this essentially acts as an offset to your current cash on hand. Do not add projected operating profits in the way operating losses are taken out because such profits assume a level of sales that may be inaccurate, and one does not want to base plans on positive facing assumptions. If planned conservatively, businesses are more prepared to deal with future uncertainty and will not have risked anything if their performance comes in better than projected.<\/p>\n

      Cash is King<\/h2>\n

      While liquidity is a good directional metric, sound planning requires cash flow analysis as it relates to time. If a business runs out of cash and fails this week, it doesn\u2019t matter that they will get $200k in two weeks. All businesses have a cash conversion cycle (CCC). The CCC is the number of days from the time businesses make various payments to the time they receive payment. The longer that time period, and the higher upfront costs, the more working capital is needed.<\/p>\n

      Let\u2019s look at a quick example:<\/p>\n