As “normalcy” starts to set in for everybody, we will spend some time thinking about how our business fits into this new normal. Specifically, we're going to spend some time working through cash and cash flow. Cash is the number that truly matters for small businesses. Which is why it gets so frustrating that most small businesses focus on revenues or profit instead. But I will spare you my soapbox speech for now.
I am going to take a few things out of order in order to help you be prepared quicker to apply for CARE Act loans. So if it feels like a couple of dots aren’t connecting, just give me a call or send an email and I will explain it.
Your target Months-Of-Cash
For people who are not used to focusing primarily on cash has an operating metri,c it should be noted upfront that this is part art/part science. We must touch on a bit of the ‘art’ today in order to make sense of the ‘science’. That will feel uncomfortable and wishy-washy for some of you as we start but by the end of the week it will all come into a clearer picture.
First thing we need to determine is what is your target amount of cash on hand. The answer for your business is largely going to come down to your own personal comfort level. There are certainly guidelines by industry that range anywhere from 3 to 12 months of cash on hand, depending on the stage of your business. But certainly, the most effective way to determine this number is to focus on what keeps you up at night.
The question to answer is “If we received in no more money for _________ number of months, how long am I comfortable knowing we can keep the doors open without drastic cuts?”
Most people will overestimate how quickly they will move to reduce costs or go into emergency mode, and as a result will put a smaller number of months in (such as three or four months). My caution here is that it usually takes one (possibly two) month to even begin realizing we have a problem, and another month or so to figure out a go-forward plan. In other words, we may eat up our cash reserve before we even really have a handle on what's going on. It won’t seem as obvious ‘in the moment’ as it is right now or after it has passed.
Also, this is a personal comfort level calculation. Similar businesses in the same industry will vary based on the comfort level of the owners. A more conservative, risk-averse owner will have a larger number than an owner who is willing to let it ride and figure it out as we go.
The Math
We're going to get right to the point and skip the theory lesson on the math. Use this tool to monitor very regularly how you are tracking towards your target cash on hand. https://seemorehawk.com/business-owner-resources/2020/3/30/simple-cash-on-hand-worksheet
The tool calculates whether you are good or have a cash shortage. If you are short of the goal, it tells you how short. It'll also tell you the average monthly delta (usually amount of expenses to be cut). We will also be using this tool to feed into some other cash planning items.
Seriously, open up the link and look at it. It will take you 30 seconds to fill out, but may save you years of frustrating, come-from-behind-work.
The latest on the stimulus package
- We have worked out a partnership to help you navigate the loans process. A colleague of mine is shifting his staff and resources to help owners get in line for the limited amount of funds (see COVID19loans.org), and is willing to help you get to the front of the queue.
o Use this link to set up a time to chat with them: https://calendly.com/supplement-advisory/complimentary-covid-19-strategy-session-seemore-hawk
o Use this link to sit in on one of their webinars: https://calendly.com/covid19loans-org/covid-19webinar
- PPP loans (via the CARE Act): By now most everybody has some feel for what is going on here. I will simply note that we are about 2 weeks away from having enough information from the SBA to begin the application process. It is also worth noting that some of the forgiveness rules appear to be bouncing around a bit. This is what the US Chamber of Commerce says you can borrow:
And this is what they believe will be forgiven:
However, it is worth noting that there may be some restrictions related to future distributions or disbursements for companies who accept these loans. (I’m picking up some softening of the ‘it is for everyone’ to more of a ‘it is for those who need it or would otherwise lay off staff’.) We don't know yet for sure.
- EIDL Applications: While we need to wait two weeks for the PPP process, you can apply today for the ‘Emergency’ loan program. They have taken down the online application process and now require applicants to fill out a paper copy and them upload the forms (not sure how that speeds anything up….).
o NOTE: as of today, the wording is touchy. Although it likely isn’t the intent, it reads like you can’t apply for EIDL if you have an application for PPP (or some similar program). That is a big change from not being able to accept both – it now reads like you can’t even apply for both. Thus, if you are turned down for one, it could be months….
Stay safe. Start managing your cash.
Brian Gramm
M 605-929-6740