Cash Flow Forecasting and Finding Liquidity During the Pandemic

Posted on Thu, Oct 22, 2020 ©2020 Drucker & Scaccetti

-D&S Marketing_049As leaders across the world work continuously to combat the ongoing COVID-19 pandemic, so must business owners of all sizes, industries, and geographic locations. Throughout 2020, the business world and global economy has swiftly transitioned from a period of growth to that of great operational and informational uncertainty.

 

For many business owners and organizational leaders, cash flow forecasting is a tool used to understand cash flexibility, evaluate liquidity, and identify risks.

 

Cash flow models are ​useful in the current economic environment. Having a cash burn analysis allows businesses to understand worst-case-scenario outcomes and plan strategically. Some examples of ​what can be accounted for in a cash flow model include:

  • Reduced topline revenues resulting from government-mandated shutdowns of nonessential businesses
  • Lower utilization of employees due to shutdown of offices and factories
  • Expiration of temporary government financial aid and relief
  • Impact of client bankruptcies and reductions in demand for services or products

Having reliable and accurate accounting data is always important, but it becomes even more so during a crisis to make strategic business decisions. In addition, financial metrics based on industry data can indicate financial health and provide actionable information. For example, the working capital ratio evaluates a business’s ability to cover short-term obligations by measuring ​current assets against short-term liabilities. There are different variations of this metric, with the most conservative measuring only cash against short-term liabilities. Lower and decreasing liquidity ratios provide valuable insight into possible cash concerns, while high ratios may indicate inefficiencies in cash management.

 

For business owners, utilizing cash flow forecasting and understanding accounting data are key to assessing cash flexibility and liquidity exposure, and are important tools in continuously evaluating these metrics in a fast-moving environment.

 

What should a business do after identifying liquidity or future cash flow concerns?

Business owners and organization leaders need to make hard decisions and consider all pathways to preservation and growth including reducing costs, delaying cash outflows, becoming lean, and looking for growth opportunities. Some examples include:

  • Offering discounts to customers to accelerate cash receipts
  • Renegotiating credit agreements or utilizing revolving credit
  • Negotiating a temporary reduction in prices with vendors
  • Taking on a cost containment approach to budgets by eliminating nonessential spending
  • Reducing payroll expenses
  • Exploring cost-efficient and growth-oriented technological improvements
  • Delaying or canceling capital improvement projects while considering future needs
  • Consider possible new revenue streams

What does business restructuring look like?

Restructuring your business does not always include selling or declaring bankruptcy. If liquidity becomes a serious concern, one of the first steps is to establish a 13-week cash flow model. This report projects financial activity for the upcoming quarter and dissects it ​week by week to allow for forecasting of cash inflows and outflows. The accuracy of the forecasts can then be analyzed, and adjustments can be made to assumptions, resulting in actionable information to restructure aspects of the business. Through this process it can become evident there is no relief to be found. Debt restructuring or strategic exiting via the divestment of the company or a segment of the company may be the next alternatives to consider. Knowing when to merge, sell or declare bankruptcy is crucial in preserving the value of the business. With a working cash flow model, the analysis of the future of the business becomes ​clearer.

 

Strategic tax planning to create liquidity for financially distressed businesses

Strategic tax planning is another method of increasing liquidity for your business and the tax provisions provided to taxpayers in the Coronavirus Aid, Relief and Economic Security (CARES) Act offer additional opportunities. ​One goal of the CARES Act was to purposefully create opportunities for tax refunds by enacting changes related to net operating loss (NOL) carrybacks. NOLs can be carried back to reduce prior year income and trigger tax refunds. In addition, excess business losses ​previously limited for tax years beginning in 2018, 2019 and 2020 can now be deducted to generate or increase NOLs. Future tax projections should be examined to compare the advantages of a NOL carryback versus the benefit of a NOL carryforward. Other ways to maximize tax deductions and boost NOL carrybacks and related refunds include:

Some additional examples of the relief provided to businesses by the CARES Act include:

  • Employee Retention Credit refundable against certain employment taxes for business that experienced suspensions of operations due to government mandated shutdowns
  • Payroll tax deferral for employer portion of FICA payroll tax (6.2%)
  • Expansion of net operating loss (NOL) carryback rules for corporations and individuals

Drucker & Scaccetti is available for consultations regarding cash flow and strategic tax planning. Our Liquidity & Restructuring Group has decades of experience helping clients in this area of their business. Call on us to discuss the cash flow issues in your business and how an in-depth analysis may help.

 

Topics: cash flow, bankruptcy, M&A, COVID-19, liquidity, data analytics, financially stressed, forecasting, restructuring, pandemic

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