Architecture & Managing Cash Flow Interior Template Creative Template 2017 during the COVID-19 Crisis Welchcapitalpartners.com
WELCH CAPITAL PARTNERS We help companies and their stakeholders understand, maximize and capture value. Welch Capital Partners is an advisory firm that helps companies understand, maximize, and capture value, through the provision of Mergers & Acquisitions, Capital, Advisory, Virtual CFO and Valuation Services.
THE COVID-19 PLAN
Pla lan Objective 1. Understand and document the impact COVID-19 will have on your business a) Create/update financial projections; know your cash in-flows and out-flows (mid to long term view: minimum 6-month focus) i. Revenue - sensitivity/scenario analysis (worst, expected, best case) • Based on sales pipeline • Based on % of prior year’s revenue ii. Expenses • Variable: can move up/down depending on the volume of sales (e.g. travel, advertising, materials or inventory, wages, storage) • Fixed: static expenses (e.g. rent, insurance, wages, loan payments) • Break even analysis iii. Balance Sheet & Cash Flow b) Depending on your initial analysis, determine the level of oversight you’ll need (daily, weekly, monthly cash flow reporting)
Pla lan Objective 2. Create an action plan a) Quick wins b) Cash flow management c) Market pivot “Nobody ever regrets making fast and decisive adjustments to changing circumstances. In downturns, revenue and cash levels always fall faster than expenses. In some ways, business mirrors biology. As Darwin surmised, those who survive “are not the strongest or the most intelligent, but the most adaptable to change.” 1 1 https://medium.com/sequoia-capital/coronavirus-the-black-swan-of-2020-7c72bdeb9753
CASH FLOW MANAGEMENT
Managing Cash in a Cris isis is Mode/Distressed Times • Know your • Revenue • Traditional Curtail runway uncertainty Forecast Capital • Alternative Spending • Longer • Expenses • Stimulus term view are known
Customers (Sales/Accounts Receivable) COVID-19 Call your customers to understand the impact of COVID-19 on their business*; get a sense of their payment ability and sales projections to assist you in modelling out your cash flow Do you have any work in progress (WIP) that you could bill out? Consider offering incentives for early payment or put pro-active payment plans in place (i.e. 6-months) Are there new revenue streams you can capitalize on (Spartan Bioscience, Thawrih)? BEST PRACTICE Review customer payment terms (payments in advance, customer deposits, early payment discounts) Make it convenient for customers to pay (credit card, wires, automated clearing house (ACH) payments, etc.) Send invoices immediately/more frequently Be diligent on collections; focus on past due accounts * Companies that are doing well should continue to support other businesses by paying promptly and providing some leniency
Key Suppliers (Expenses/Accounts Payable) COVID-19 Call your key suppliers to understand how COVID-19 will impact your supply chain (i.e. delays in orders)*; maintain strong relationships Assess inventory levels – do you have the appropriate levels if there may be a disruption to your supply chain (too much, safety stock, obsolete) Negotiate payables (terms, due date, partial payments, new pricing, extend contract terms for better pricing) Prioritize payments to key suppliers vs paying everyone * Companies that are doing well should continue to support other businesses by paying promptly and providing some leniency
Other Vendors (Expenses/Accounts Payable) COVID-19 Call key vendors to understand their situation*; maintain strong relationships Negotiate payables (terms, due date, partial payments, new pricing, extend contract terms for better pricing) Slash expenses where necessary Workforce adjustments Hiring freezes Capital project deferral Right-size operational cost based on any workforce adjustments (i.e. subscriptions, licenses) Eliminate all discretionary spending (i.e. training, travel, meals & entertainment, advertising) * Companies that are doing well should continue to support other businesses by paying promptly and providing some leniency
People Employees* Consider temporary lay-offs (13 weeks, maintain benefits) Consider permanent lay-offs (right size organization) Reduce contract labor and redistribute work to full-time employees Owner/management compensation reduction (review full incentive plans: discretionary bonuses/commissions) Offer reduced work week, voluntary leave without pay, work-sharing arrangements Reduction of pay for all staff Consider accessing a contingent labor pool (VCFO, VHR, VGC (in-house legal council), etc.) * Consult legal council – depends on contracts
Other Other Considerations Understand your business interruption insurance Accelerate filings where you are owed money (SRED, HST, Corporate Tax, etc.) Sell non essential assets Long term: What other functions could be outsourced to reduce costs and diversify risk (i.e. contract manufacturing vs in-house, third party warehousing, contingent labor, etc.)
Capital Traditional/Commercial Lenders Speak to your Commercial banker and renegotiate loans if possible Increases in lines of credit Postponement of principal payments on loans New financings – lower interest rates Apply to BDC ($100,000 small business loan, 6 month principle postponement, 5 year years + working capital, acquisitions, PO financing, etc.) Take advantage of financing options (i.e. equipment financing vs outright purchase) Alternative Lenders Factor receivables Purchase order financing Debt & Equity alternatives (VC, Private Equity)
SUPPORT FOR BUSINESSES
Key Federal Government Subsidies - Business Subsidy Description $40 billion Federally Guaranteed EDC Guarantee - $20 billion • Loans for Small & Medium Enterprises Guarantee new operating credit and cash flow term loans that financial (SMEs) – Business Credit Availability institutions extend to SMEs, up to $6.25 million • Program: SME Loan & Guarantee Applies to domestic companies and the export sector • Program 80% EDC guarantee, 20% by a financial institution BDC Co-Lending Program - $20 billion • Co-lending program for SMEs to provide incremental credit amounts up to $6.25 million maximum per loan. • 80% BDC, 20% by a financial institution • Commercial interest rate • 10-year repayment period • Financial institutions are the interface with clients for both programs • Companies could obtain up to $12.5M through these two lending streams • The definition of eligible businesses has not been provided • Roll out will occur within 3 weeks after March 27 th
Key Federal Government Subsidies - Business Subsidy Description $40 billion Federally Guaranteed BDC is offering low-interest loans up to $2 million if your business has been Loans for Small & Medium Enterprises generating revenue for at least 24 months • (SMEs) – Business Credit Availability Was “bankable” before COVID -19; not in breach of covenants or Program: SME Loan & Guarantee Commercial Lender is willing to waive the covenants • Program ~ 3.5%, 6 month postponement of principal, 3 year term • 6 month cash flow impact • https://www.bdc.ca/en/about/mediaroom/news_releases/pages/bdc- announces-additional-measures-provide-relief-canadian- entrepreneurs.aspx • $40,000 in Federally Guaranteed Organizations that paid between $50,000 and $1 million in total payroll in Loans to Small Businesses & Not-for- 2019 and experienced a decline in revenues due to COVID-19 • Profits (administered by EDC & Interest-free • financial institutions) – Business If loans are paid off by December 31, 2022, 25% of the loan will be Credit Availability Program: Canada forgiven. • Emergency Business Account ($25 Contact your financial institution for details. billion) .
Key Federal Government Subsidies - Business Subsidy Description • Defer Tax Filings ($85 billion) Defer payment of any income tax amounts that become owing on or after March 18 th and before September 2020 – payment due September 1, 2020 • Defer payment of GST, HST and customs duties until June 30, 2020 • No interest/penalties during the deferral period Retroactive to March 15 th and available to June 30, 2020 • 3 month, 10% Temporary Wage • Subsidy for Employers ($975 million) $1,375 max per employee; $25,000 limit per employer (may increase with the percentage increase) • Eligible employers can claim the reduction by withholding payroll income tax deductions (only income tax, not CPP or EI remittances) • Taxable • EI Work Sharing Program Offered to workers who agree to reduce their normal working hours because of developments beyond the control of their employers. • EI eligibility extended to 76 weeks vs 38 and eases the eligibility requirements
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