Coping with the Coronavirus Cash Crunch
If you’re like most small business owners, you’re suffering from a shortage of cash due to the coronavirus pandemic. With lots of money going out the door and much less coming in, what should you do to cope with the coronavirus cash crunch? In this article, we’ll discuss four critical steps to take to ensure your business survives this unprecedented time:
- Forecast cash flow
- Adapt your business practices to generate income
- Cut costs
- Apply for financial assistance programs
1 | Forecast Cash Flow
Cash deficits are the #1 reason businesses fail. COVID-19 is exacerbating the problem. How long will it take for your business to run out of cash if you have reduced or no income in the near future? You’ll surely feel stressed and anxious if you don’t have a good handle on how much money you need to sustain your operations.
The solution is a cash flow forecast that predicts future inflows and outflows of cash. By looking ahead, you’ll eliminate the much of the uncertainty about the cash you’ll have on hand next week or three months from now. Do not manage cash simply by checking your bank account balance. A bank account balance is simply a snapshot in time that doesn’t provide insight into how much cash you’ll have in the future.
If you don’t have a forecast, don’t delay in creating one ASAP. A basic cash flow forecast involves the following:
- Start with your beginning bank account balance for the time period at hand, whether it’s the current week or month.
- List all your inflows of cash from sales, loans, or other sources.
- List all your outflows of cash such as payroll, rent, and credit card payments.
- Add your total cash inflows to and subtract your total cash outflows from your beginning bank balance. Then you will have a forecast of your ending account balance for the time period.
2 | Adapt Your Business Practices to Generate Income
Many states have ordered non-essential businesses to close through at least the end of April 202o. If your business is suffering a loss of income, it’s time to get creative. Enlist the help of a friend, family member, or colleague to brainstorm how you can continue to offer your products and services in a different way. If you’re a service provider, determine if you can deliver your services online via video conference instead of in person. If you sell products, you might be able to promote gift cards, offer delivery services, or set up a safe, socially distanced way for your customers to pick up your products. And don’t overlook the power of social media to keep your business top of mind and offer special promotions.
Be sure to stay on top of your accounts receivable and follow up with customers who are late on payments. Bill customers as soon as you deliver your product or service. Consider using a factoring company (factor) to get an advance on the receivables your customers owe you, before their payments are due to you. For more information on factors, see our article on cash flow.
3 | Cut Costs
If you’re suffering from a severe cash shortage, cost cutting is essential. What should you do? First, reduce or eliminate all non-essential expenses. Postpone major purchases. Sell excess inventory. Delay payments to vendors as much as possible.
Rent and payroll are the two biggest operating expenses most businesses incur. Ask your landlord or mortgage lender if you can defer payments to a future date. Some lenders are offering rate reductions on existing debt. Payment deferments of up to six months are available on Small Business Administration 7(a) and 504 business loans and microloans. Learn more about SBA loan deferments.
Lastly, in this exceptionally low interest rate environment, consider consolidating and refinancing any existing debt at a lower rate o save on interest expense. Contact your lender or finance professional for assistance.
4 | Apply for Financial Assistance
The landscape of available financial assistance programs is evolving rapidly. Information in this section was last updated on April 2, 2020.
The Small Business Administration’s Economic Injury Disaster Loans (EIDLs) and Paycheck Protection Program (PPP) forgivable loans are federal financial assistance programs available to small business owners.
SBA Economic Injury Disaster Loans are available to businesses and non-profit organizations suffering losses from COVID-19. The funds from disaster loans can be used to pay your employees, vendors, and creditors. Disaster loans provide up to $2 million in assistance for business owners and have favorable terms including low interest rates and long payback periods. As of this writing, the interest rate for disaster loans is 3.75% for small businesses and 2.75% for private non-profit organizations. The length of the loan payback period will vary based on your ability to repay and can be as long as 30 years. Apply online for an EIDL.
The Paycheck Protection Program provides forgivable loans to small businesses to pay their employees during the pandemic. The loan amount is based on 2.5 times your average monthly payroll cost. The entire loan amount will be forgiven (you don’t have to repay it) if you use the proceeds to pay for payroll costs, rent, mortgage interest, and utility costs and you maintain staffing and compensation levels. Businesses may begin applying for a PPP loan on Friday, April 3 via an SBA lender, any federally insured depository institution, or other regulated lenders approved by the Treasury. Contact your local bank to find out if it is participating in the program. Get all of the details about Paycheck Program , including fact sheets from the U.S. Department of Treasury, U.S. Chamber of Commerce, the PPP application, and Momentum CFO’s summary infographic.
In addition to exploring federal assistance programs, research financial assistance programs that are specific to your industry and location. Special funds have been established for businesses in various industries. In some areas, local government agencies are also providing assistance. For example, the City of San Diego’s Small Business Relief Fund is available to local businesses affected by COVID-19. The fund provides grants and forgivable or low to zero interest rate loans to eligible small businesses. Rely on your good friend Google and start searching!
This is a stressful time for most business owners who are navigating uncharted waters. Don’t hesitate to seek help from a finance professional if needed. As a service to the community, Momentum CFO is offering a limited number of complimentary coronavirus financial consultations through the end of April 2020. Grab your spot today!
About Momentum CFO
Momentum CFO is a boutique firm specializing in outsourced Chief Financial Officer services for small to mid-size businesses. We help clients increase profit, improve cash flow, plan, and make smart financial decisions. Enjoy the benefits of Fortune 500 financial expertise without the cost of a full-time CFO.