Cash Flow Forecasting in Scary Times
Many construction businesses right now are struggling with the immediate reality of financial forecasting as business shuts down for an indefinite period of time. As you try to figure out whether you can continue to pay employees, advance vacation or sick time, or even just keep the lights on in the back office, there are a variety of cash flow forecasting tools that can help.
While cash flow forecasting can be a scary topic for most business owners in a crisis (it’s easier to pretend you don’t know) it can be a critical decision-making tool. You’ll sleep easier if you can grapple with the problem up front and take control of it, than if you sit back and wait in the hope that it will take care of itself.
There are a couple of ways to do this:
Pencil and paper
Excel spreadsheet/Google Sheet
Forecasting tool in QuickBooks (note: this is only available in Premiere or Enterprise versions > look under Company>Planning & Budgeting>Cash Flow Projector)
The basics of the Cash Flow Projection are breaking down money in and money out of your business on a week-by-week basis. For the purposes of this tutorial we’ll use QuickBooks, but you can also use our basic template here (you’ll need to save a copy to make changes). The limitation of their pre-built tool is that it only projects six weeks out. But at this point there are so many unknowns it’s hard to predict beyond that. Six weeks is at least a good place to start.
First, you’ll need to know how much cash you have in the bank. QuickBooks should pull the amounts from all bank accounts (you can choose which ones to use - for example, if you have a separate account for Customer Deposits, I’d recommend you don’t touch that one). Ideally you’re up to date with all deposits, bills entered, etc before you start this exercise.
Second, you’ll want to look at your current Accounts Receivable and assess when you expect to receive those payments - you have the option to pull averages or from the same period of time last year, but I recommend you choose the manual option and plug in a subtotal by week. Go to Reports>Customers & Receivables>A/R Aging Summary to see all your current receivables. Then you’ll need to make your best guess at when you expect to receive the payment - this week, next week, 2 weeks, or, is this never going to be paid and needs to be recorded as bad debt?
You can plug in each of your current invoices manually and assign a date when you think it will be paid (top section) then estimate a subtotal of what you anticipate you’ll invoice (in the future) by week (bottom section).
Next, you need to anticipate your Expenses. Think about your monthly expenses that are the same every month (rent, phone, internet, vehicle lease, insurance) - what are the basics you need to maintain to “keep the lights on” and are those monthly, weekly, etc? If you’re not sure, it may be helpful to pick a recent month (that has had all the expenses entered into QB) and do a Profit & Loss report (Reports>Company & Financial>Profit & Loss Standard - and adjust the date range to Last Month).
You’ll also need to think about Payroll. First look back at recent payrolls (your previous month P&L can be useful here too) and divide your Payroll total by 4 or 2 depending on whether your payroll is weekly or bi-weekly. That’ll give you a sense of what you’ve paid in the past with everyone working “normal” hours. You can plug your regular payroll into the cash flow, but you may need to adjust this and put in a weekly number based on your plans. For example, you may be able to keep everyone on for 2 weeks and pay out vacation/PTO in advance, but then after that go down to only essential staff going forward. In that case if the Payroll line is going to change weekly then you’ll want to enter it as a “one-time” expense and date it for your payroll dates looking six weeks out.
Then think about your Payables. QuickBooks will pull in all unpaid bills and their due dates. You have the option to adjust the due dates and extend them if necessary. In the Adjustment category below you can also add in other bills you know are coming but just haven’t been entered into QB yet.
When you get to the last window you’ll see how all the pieces come together:
If your ending balance goes negative at any point over the six week projection, you know you’re going to have a cash crunch. You can go back and tweak the sections as needed. Maybe you’d decide to tap a line of credit to get you through a rough spot before the revenue is going to come in (you can enter that in Adjustments in the first window; if you’re able to pay it back down within this six week window you’d also add the reversing entry in the Expenses adjustments window).
Because variable costs naturally drop when sales drop, cost cutting efforts focus mostly on reducing fixed costs. Certainly chisel away at variable costs the best you can to reduce variable costs as a percentage of revenue. However, if a business shrinks significantly in size it is inevitable that fixed costs will be too high as a percentage of revenue. Current fixed costs were built up to support the company at its current volume levels, not a company producing significantly smaller volume levels.
Ultimately cost cutting is a matter of deciding which costs can be cut with the minimum impact on serving existing customers, “keeping the lights on” from an administrative perspective, and preserving the ability to bring in new customers now and in the future when economic activity picks up.
The largest fixed cost in most businesses is payroll. Eliminating salaries is a painful decision though often necessary. Sometimes there are alternatives to permanently terminating employees, such as temporarily moving certain positions to part-time or an across-the-board salary reduction or a furlough. Because cutting good employees has longer term consequences, many businesses take a hard look at other non-payroll costs and see what other variable or fixed costs can be cut before eliminating employees.
-Calvin Wilder, Modeling and Managing the Financial Impact of COVID-19 on Your Business
Furlough versus Layoff
The exact definition may vary from state to state, but generally furlough implies a temporary reduction in hours that is unpaid time off. Furloughs can be voluntary or mandatory. Hourly employees could be furloughed and still work part time. If furloughed, the employer is not required to pay out any accrued paid time off (vacation, holiday, sick time) and the assumption is the employees will return to work. If you have salaried employees you have to furlough a whole week at a time (i.e. if a salaried employee does ANY work during that week you have to pay them their full salary). It’s up to the employer whether they continue to pay benefits like health insurance during a furlough. When employees are furloughed, employers should expect that they will not work, including checking email and voicemail.
A layoff can be temporary or permanent. If employees are laid off, they are entitled to be paid out any accrued PTO. Typically if an employee is laid off all benefits stop at that point, but the employee would be eligible for COBRA to continue health insurance coverage through the company for up to 18 months.
Reduction in Force typically refers to a permanent elimination of a position without an intention to rehire. Sometimes a layoff turns into a RIF.
We recommend all employers consult legal counsel when navigating issues of layoff and furlough, especially as it relates to benefits, health insurance, and COBRA.
To Borrow Or Not To Borrow: That is the question
There are a few things to think about before going into debt. Do you have a Line of Credit (LOC) with a lender? Is it worth a call to them to find out if you might be able to extend the LOC given the circumstances? If you are looking to establish a LOC for the first time, reach out to your current bank versus trying to establish a new banking relationship.
Generally, it’s risky to rely on the LOC if you don’t know where the revenue is coming from to repay it. A LOC can be really useful if you need it short term to cover payroll while you’re waiting for a big check to come in from a Customer. Another way to look at it is to consider you should never borrow more on your LOC than you have in your Assets. In the unfortunate circumstance where your business could cease operation, you’d want to be able to sell off the business assets to be able to pay back the Line of Credit.
If you have already drawn down a large percentage of your LOC, consider converting it to a term loan that locks in a low-interest rate and basically puts you on a schedule for repayment.
A number of options are starting to appear for short term emergency business loans like the SBA’s Economic Injury Disaster Loan Program and other state-specific sources. Remember that if you personally guarantee a loan to your business, you’ll still be on the hook if the business goes under. If you are getting ready to apply for loans, you’ll need to do some preparation. Make sure your bookkeeping is up to date. Finish and file your 2019 taxes. You’ll need 3 years of personal and business tax returns for the loan application. They’ll also want to see a debt schedule and ideally a 2020 forecast so you can communicate to lenders what you’re currently anticipating in terms of your needs.
Putting expenses on credit cards should be the very last option due to the high interest rates. If you end up with a large balance and are accruing 18-30% or more, the interest and fees can quickly pile up and you’ll never be able to get out of the hole.
Communicate With Your Creditors
Whether it’s your local hometown bank, the landlord of your office space, or suppliers/vendors that you have existing credit terms with, it’s worth reaching out now to find out if deadlines can be extended an extra 15-30 days to allow time for you to collect cash from your customers.
Business Resilience on the Accounting Side
There are currently a number of factors that will affect business operations - employees working from home, furlough, layoffs, forced shelter in place, so now is the time to set up some redundancy and backup systems for your financial affairs. Ensure that there are at least two people who have the ability to access your bank accounts, run payroll, and cut checks. If access to your office is cut off, can someone remotely cut checks and process basic financial transactions? Activate online banking and bill pay options if you haven’t already, both with your clients and your vendors. Review your insurance policy for business interruption coverage.
Be Ready to Gear Back Up
If your job sites or crews are on hold right now, either furloughed or laid off until work can resume, it can be tempting to pay out vacation time, sick time and other PTO so they can continue to have a paycheck coming in. Part of cash flow planning, though, is also leaving enough in the bank that you can not only meet your current obligations but also cover expenses when you are able to resume operations. You’ll need at least the first payroll in the bank when you start back up.
Stay smart and healthy out there - it’s going to be tough, but we’ll get through this.
Other Resources
https://smartbookscorp.com/resources/articles/covid-19-resources-for-small-business/
https://www.hayscompanies.com/covid-19-considerations-termination-and-furlough-issues/
https://www.thehartford.com/business-insurance/strategy/alternatives-layoffs/furlough-program
https://gusto.com/blog/people-management/coronavirus-employers-guide