ArchivesRestructure Debt Archives — C. Lynn Northrup, CPA, CPIM
The pandemic has stressed and challenged businesses to the limit. Survival is a real question, asking many, can we make it? These unusual times call for steps and actions where most business owners and their CPA advisors have no experience.
Assess for Areas of Pain
The first step is assessing the business and identifying the biggest areas of pain. Then quick action is needed to address the most critical areas and take action to stop the bleeding. I call this moving from crisis to stabilization. You can’t survive without cash flow so this needs to be a top priority.
Do everything to keep your creditors and lenders comfortable and share with them your plans to stabilize the business. Give them full respect and attention together with up to date information on collateral.
Creating Cash Flow
Creating cash is pulling cash from your balance sheet and the balance sheets of your customers and vendors. The cash you generate in this way will help to fund the stabilization of your business.
Analyze your cash flows and take the steps needed to stabilize and generate as much cash as possible. The obvious steps include applying for SBA loans and Payroll Protection Program loans. Do everything possible to generate sales and keep key customers. Exploit every opportunity to create cash and address the biggest cash drain areas and plug those leaks as fast as possible.
Analyze Your P&L Statement
You then need to look at your profit and loss statement to identify the problems and opportunities to eliminate cash drains or reduce their impact. Declining sales is the most obvious issue. The next question is what is your gross profit margin? Benchmark it to your industry and business model. A lower gross profit margin means that you’re either not charging enough or your business processes are inefficient. You may need to increase prices or improve your business processes or both.
The next area is overhead and how much can you reduce it. The biggest areas will be payroll, insurances, facilities, and interest. You probably need to address all these areas.
Once you stabilize sales, you need to determine a business structure that can support a lower level of revenue. If revenue is cut in half, how do you adapt? How do you reorganize your business around that new reality? Make a conservative guess on revenue and build a plan to become profitable at that reduced level. Forecast cash flows and find ways to stay cash positive.
Create a Survival Plan
Create a survival plan and then sell it to lenders, vendors, employees, and key customers. This is a better option that going through a liquidation. Keep your plan simple and straight forward.
When going through this process, it is essential to move quickly. Do as much as possible as fast as you can. These should include layoffs, reduced or closed operations, and charging higher prices. Get all this done and then focus on recovery.
During the recovery, concentrate on rebuilding confidence and morale. Restructure your debts around the newly reorganized business. Try to stretch out the debt or in extreme cases, see if your lender would be willing to reduce the amount of loan balance.
Once you have restructured your business, you’ll have a more positive framework from which to grow the business with new strategies and ideas. By taking these steps, you’ll be positioned to take advantage of new growth opportunities and increase profits going forward as the pandemic subsides and we reach a new normal.
© C. Lynn Northrup, CPA, CPIM