Careful Management of Liquidity Through the Pandemic

During the current economic downturn, companies must be extremely disciplined in managing liquidity, especially given the uncertainty around the timing and prospects for a rebound. Even if a company has applied for – or received funds – from government relief programs, including the Paycheck Protection Program (PPP), liquidity must be a priority. No one knows how long stay-at-home rules and economic pain will continue, but we do know the return to normal will be slow and the pace will differ significantly by industry and geography.

In order to best position a business to weather this crisis and maximize the opportunity for a successful rebound, Carl Marks Advisors believes management teams must focus on their cash position daily and work diligently to preserve liquidity. This means carefully tracking incoming and outgoing cash as well as calculating tax and other obligations that are being incurred, even if they are not in the queue to be paid in the short-term.

Cutting costs, of course, has been an imperative for most companies since the outbreak. Discretionary expenses have been eliminated and many businesses made the hard decision to furlough or terminate staff, postpone capital investment, or defer other obligations where necessary. Some companies are also drawing down on revolving lines of credit.

Based on our experience as operational and financial advisors, Carl Marks Advisors recommends five additional steps companies can take as part of an effective liquidity management plan:

Renegotiate Unpaid, Current and Go-Forward Rent Obligations

In many cases, it may be possible for a business to negotiate reductions or deferrals in rent or lease payments. While landlords aren’t giving up their rights and won’t necessarily negotiate beyond the present month, with all of the current uncertainty, many are willing to talk about alternatives to payment schedules. Tenants should recognize that landlords have little incentive to evict a good and established tenant since they’d be left with a vacancy for an uncertain period of time. This creates an opportunity for tenants to receive a rent abatement on more favorable terms, and even potentially reset the rent and stay in the space.

There are additional solutions that tenants should look to as well. For instance, you can pursue deferrals on rent such as adding deferred months to the back end of the lease, or spreading deferred rent payments over 12-18 months after an initial period of abatement. For tenants in the retail and restaurant sectors, another option is to offer landlords a percentage of sales as payment in lieu of base rent for a period of time.

These suggestions won’t work for all businesses, but it is imperative to understand that landlords will be far more willing to negotiate when tenants present an actionable plan.

Reduce Cash Payments for Goods and Services

While there are naturally limitations, opportunities to reduce or defer the use of cash to pay for goods and services should be pursued as much as possible. Businesses can often rely upon credit terms to accomplish this. Similar to landlord negotiations, management teams should engage vendors to discuss creative ways to reduce cash outlays, either through extended terms, payment plans or a temporary amendment to minimum purchase obligations. They can also preserve cash and defer purchases by transferring goods from locations that have closed or may be operating on reduced hours.

It’s also vital to regularly re-underwrite the willingness and ability of customers to pay for goods and services sold, as well as for forthcoming orders. Though it’s hard to forward forecast customer behavior in this environment, failure to manage accounts receivable effectively can have a dramatic negative impact on liquidity.

Determine if Certain Local, State and Federal Taxes Can Be Deferred

Many government entities have implemented or are considering tax deferral options. For instance, one Federal tax deferral program already in place under the CARES Act allows businesses to defer 2020 employer Social Security tax payments into 2021 and 2022 with no penalty or interest, with 50 percent due by the end of 2021, and the remainder by the end of 2022. Doing so should not impact your eligibility under the PPP program, but you should consult with a tax advisor before implementing this deferral. Further, researching what’s available to your company in states and municipalities where you have locations is a high-value activity.

Develop a Post-Crisis Cash Flow Budget

Current and post-crisis cash flow budgets will be dramatically different. It’s important to identify the amount of cash your business will need to effectively ramp-up once stay-at-home orders begin to be lifted and the business environment returns to more normalized levels. It’s important to consider not only routine cash needs, but also any costs that will be incurred to fund operations as the business rebounds. And, as operational plans are being developed, businesses must recognize that accounts receivable will be considerably slower and bad debt will be higher than in the recent past.

For some companies, accounts receivable have been a lifeline in this environment, since they’ve been able to collect working capital while experiencing lower SG&A costs and have found ways to defer rent and other operating expenses. However, as things begin to normalize and ramp-up, businesses will need to pay expenses on more current terms. Said another way, the real cash need will arise when things start back up.

Consider Potential Staffing Needs

As businesses think about liquidity, they need to consider employee requirements – both training and hiring staff. It’s likely a bigger piece of the post-crisis budget than businesses are accounting for. In a post-COVID-19 world, workplaces and retail establishments will look drastically different, with increased sanitation and safety measures in place. It will be incumbent upon businesses to deploy resources into training their staff to abide by new prevention measures, as well as to ensure that visitors and customers also adhere to precautionary measures.

Additionally, for many terminated hourly employees, especially in the retail and restaurant sectors, unemployment benefits, including the additional assistance provided by the CARES act, may be higher than wages formerly earned. Because of this, many employees may be less inclined to return to work, particularly if their potential income is limited by companies working at half capacity.

Research suggests that the additional cost of replacing workers ranges from 16% – 213% of annual salary depending on the level of the employee. Management teams will need to think creatively to incentivize staff and avoid the high cost of hiring and training new staff as the business begins to rebound. Incentives may include maintaining pay, increasing benefits, and retraining.

These actions are also costly, so companies will need to weigh them against the cost of simply hiring new workers. Businesses will face high costs to replace workers in the future and to retain current workers, leading to higher costs for consumer.

Paying careful attention to the cash position and actively managing liquidity is vitally important for companies across the board, as we all work through the current challenges and begin to rebuild. Carl Marks Advisors is here to help. Please reach out to a member of our team listed below for advice and perspective you may need on liquidity management in the current environment.

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