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A Plan for Small Businesses facing a Financial Crisis

Matthew P Collins

March 24, 2020

A plan for Small Businesses facing a financial crisis

Fortunately, small businesses facing a financial crisis have at least two natural advantages:

1.      Being small allows you to react quickly to a crisis

2.      As a small enterprise, you generally have a lower level of overhead compared to big global                       companies.

These two inherent small business advantages should give you the confidence you need to react quickly to the crisis with a well thought out plan that is executed properly in order to ride out the financial storm. There are basically three areas for you to focus on during a time of crisis:

1.      Maintaining revenues and getting paid by customers

2.      Maintaining the appropriate level of employees needed during the crisis with an eye out for staffing needs as you recover.

3.      Controlling overhead. Naturally, at all times you want to minimize overhead which are fixed costs that are due regardless of sales volume. But during times of crisis, it is really important to be lean so you can operate during periods when there is very little cash inflow to cover business cash needs to pay fixed obligations.

Steps to follow for managing your business through a crisis:

1.      Ensure Strong Leadership. Strong, highly visible leaders build strong cultures, rich in values. These values will not only serve as a foundation for your crisis planning initiative but, in the face of a crisis, they will determine how well your company responds. 

2.      Assemble a Crisis Management Team. This should include individuals from multiple disciplines within and outside your organization, to develop your crisis management plan.

3.      Develop a Crisis Management Plan. Crisis plans should then be developed to detail the exact response needed for each possible situation.

4.      Train your Employees. This step is essential. As they engage in their daily activities, they should have the training and background required to not only perform their jobs but to identify potential issues. They should also be empowered to bring issues to the attention of the business owner or key management team. In addition, your employees need to have a thorough understanding of their role in the face of a crisis.

5.      Communicate Timely and Consistently. Your company’s viability is directly dependent on timely communications with internal and external stakeholders, beginning with problem acknowledgment and ending with air-tight solutions. Message consistency is also key. Differing messages damage business credibility and will stall the recovery process.

Action Items for Dealing with a Financial Crisis

  • Talk with your employees. Your employees are not oblivious to your situation. Sit down and have a conversation with your employees. Explain the situation to them and the fact that you have a viable recovery plan. Ask them for their commitment during this tough period. Maybe there is a willingness for temporary pay cuts during the time of crisis. The difficulty of managing staffing levels during times of financial crisis is not reacting quickly enough to reduce staff and losing key employees when the recovery begins. There is not a textbook answer for this issue other than you need to proactively assess and re-assess your situation and have a conversation with your employees ASAP.
  • Have a conversation with your Banker. Leverage your past performance and a good relationship with your bank to obtain or increase a line of credit to cover overhead and payroll. Ask your Lender to temporarily defer loan payments. Act now before your loan is in default. Bank regulators will allow loan modifications if the borrower is less than 30 days past due. Recently announced “Regulators clear way for loan modifications due to CODIV-19”.
  • Talk with your landlord. Explain your situation and request rent relief in the form of rent abatement and/or a temporary rent reduction that will be repaid over a negotiated period of time. For example, a landlord might be receptive to abatement (rent waived; no repayment required) of a couple of months’ rent along with rent reduction for subsequent months that fit with your recovery plan. The reduced rent can be repaid over the remaining lease term. You need to have this conversation with your landlord.
  • Owners might need to cut back on their pay to help with business cash flow. Keep in mind that reduced wages to the owner save the business payroll tax costs.
  • Look at your customer base. During times of financial crisis, you need to step up your due diligence of the creditworthiness of your customers. When cash is tight, you cannot afford to sell products and services to at-risk customers who are likely to not pay you.
  • Take advantage of government programs:
    • Small Business Administration Disaster Relief Loan Program. Helps small businesses with working capital needs during disaster recovery. The current maximum interest rate is 3.75% with loan terms up to 30 years. 
    • Investigate other government loan and relief programs (TBD; there are expected to be a variety of relief and assistance programs that will be available to small businesses).
  •  A crisis is a good time to review spending. First, you need to determine how much you need to reduce overall costs in order to survive and then work on a plan to do it. For example, when you consider the expected cash flow coming into your business during the crisis you can then project the estimated cash shortfall. After factoring in shortfall funding from bank loans, landlord rent concessions, and other sources, the remaining cash shortfall needs to be funded by expense reductions. Let’s say after going through this process you need to reduce overall expenses by 30% which equals $50,000. The reality is you need to find a way to reduce your expenses by $50,000 in order for your crisis recovery plan to work. You need to do this. If not, you are missing a key opportunity to avoid the controllable extra risk of not having a plan in place for managing cash during a financial crisis. 

You don’t need to fly solo during a time of crisis. Build a team. Build a plan. Execute!

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