Just hit American soil after “vacationing” in Barcelona to visit my daughter studying abroad. Needless to say, our vacation turned into evacuation. During our cobbled-together plane trips home, we repeatedly watched flight attendants run through safety shpiels. You know them – how to put on oxygen masks in case of cabin decompression, etc. They always include the phrase; “make sure your oxygen mask is secure before helping anyone else”. CFO’s – we’ve lost corporate cabin compression due to the COVID-19 pandemic. It’s time to make sure we put our oxygen masks on first.
What does this mean? All routine activities – yes, all routine activities – are stopped until you develop Pro-forma Financials for the next year. Run through your YTD financials line by line and create an action plan for every major category that can be restructured to protect free cash flow. Then formulate a team to research and suggest new cost cutting assumptions for the year ahead.
The Key is protecting Free Cash Flow.
Restructure Using YTD Balance Sheet Categories:
Cash – A roll forward based on retooled cash requirements.
Accounts Receivable – Identify risk-prone receivables and immediately negotiate new payment terms. Get these customers obligated to you early on (similar to dealing with a bankruptcy). Make sure your negotiated payment plan is in place before others start negotiating.
Inventory – Just in time or stocked, you need to understand your sell-thru and/or price fluctuations for this highly important piece. Any changes will roll into projected COGS numbers and impact GPM. Make sure the senior team agrees on assumptions for this piece.
Investments – If you have them, walk away and move on to the next item. Your energy isn’t well spent here in the first round.
Equity Investments – You need revised equity projections from your partner companies. Back into the P&L Investment Income/Loss based on this change. If it looks too ugly, decide whether you negotiate a deal to cut the cord in order to dodge an expensive capital call.
FP&E – What are you financing and what can be restructured. You’ll be making a case with your lenders to restructure so paint the best protective financing scenario you can.
Real Estate – This is most likely in a separate LLC, but can you restructure the debt to take advantage of lower interest rates? If this is leased real estate, can you negotiate short-term rent abatements and tack them on to the end of your lease?
Accounts Payable – Negotiate extended payment terms for all vendors unless a cash discount makes better sense. I use the term “negotiate” loosely. You may just need to stretch disbursements out as far as possible.
Debt – Ok, here’s a big one. The pro-forma financials are used as an internal roadmap out of the crisis. But, they have significant value in establishing how much additional cash is required to hit your target free cash flow and profitability. Credibility with your lenders is key and you’ll use the pro-forma financials to establish what you need and demonstrate why you need it. Then you can confidently negotiate a LOC over-line increase, lowed or abated interest, loan payment abatements on collateralized debt and debt covenant waivers.
Make sure your lender sees exactly what you see. To earn their buy-in produce reliable numbers based on good assumptions. Look at numbers through their lens and anticipate areas of push back. Lenders don’t want to foreclose on your business, but you need to make it as easy as possible for them to help you.
Equity – The board needs good information to re-evaluate authorized equity distributions/dividends to preserve cash. Make your recommendations based on the pro-forma numbers and get the board to vote on a restructure. Take into consideration revised tax liabilities based on estimated tax abatements.
Restructure Using YTD P&L Categories:
Revenue – Impair projections for pipeline cancelations. Be conservative. Review you current backlog and test for revenue that might not close or will be delayed.
COGS – Roll your inventory projections into COGS and make sure your new GPM is defensible.
Payroll – Generally the largest operating expense category. Develop a bunkered compensation structure. Do you need to cut bonuses and base compensation for a period of time to fortify corporate finances without layoffs? If layoffs are inevitable, put a plan together and swiftly execute – triage moves quickly. But please, make sure you’re not cutting sales compensation that might lower revenue. You must continue to incentivize your sales force.
Taxes – The U.S. Treasury and the Internal Revenue Service are allowing corporations to defer tax payments – both for 2019 taxes and Q1 2020 estimates – until July 15 with no penalties or interest. Work with your tax advisors to estimate your tax deferral. You’ll also need this in estimating equity distributions to cover tax estimates for S-Corp designations.
These are the major financial categories for most companies. Other expense categories can be reviewed as time allows for additional cost savings. Remember, it’s all about protecting Free Cash Flow.
Once you have working pro-forma financials you’ll be breathing oxygen and have your wits about you. You can do the fine tuning at time allows. Next, work with teams to execute the restructuring and move into the new normal. .
You will get through this. Be swift and confident in what you’re doing. Bring in as many stakeholders as possible for input, but don’t hogtie the process. And please don’t downplay the role of common sense and gut feelings in this process. You know the numbers better than anyone.
All stakeholders look for your leadership – leadership you can demonstrate once your breathing is stabilized.
“Experience breeds wisdom, and wisdom breeds vision – Dalai Lama”