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Struggling Business: The First Step Toward Recovery is a Budget

Written by: Christopher M. Dube & Joseph A Foster

6/1/2020

Many small businesses are facing unprecedented financial challenges. For some, the difficulties began before COVID-19; for others, businesses that were previously financially solid are suddenly wondering if they can survive. In either case, it is critical that management take a fresh look at their short and long-term cash flow.  More frequent cash flow monitoring and reassessment of assumptions in pro forma financial statements should be the new normal for management during the crisis.  For many, this cash flow analysis reveals a troubling trajectory and they are faced with unfamiliar prospects such as having to negotiate a “workout” with creditors or file bankruptcy.

Once a cash flow analysis and 13-week pro forma budget are completed, Management should test the analysis with a variety of assumptions to determine if it is likely that the business will be able to generate sufficient cash flow going forward to cover operating expenses; and, if not, whether it can reduce operating expenses to a level that will make that possible.  If so, then it may be possible to resolve accrued debt and other liabilities in an out-of-court workout or bankruptcy proceeding. 

If the goal is to negotiate a compromise with the business’s lenders and other creditors that reduces or delays payment, then having completed the cash flow and budget analysis is essential.  Management will need to articulate the results and the creditors will likely want to see the numbers to make their own assessment.

Everyone agrees that accurately projecting revenue under current market conditions is more challenging than under normal economic circumstances.  Nobody knows with certainty when restrictions on operations will be fully lifted, whether consumer preferences have or will change, whether consumer behavior will return to pre-pandemic norms; and, if so, when.  It is also uncertain whether the answers to those questions will have short-term or long-term impacts.  As a result, your ability to articulate the assumptions you make in preparing forecasts and defend the validity and effect of those assumptions will be key to convincing a creditor that your proposal is fair and achievable.

If you cannot identify a plan to change a downward trajectory of the financial condition of the business and the future of the business appears in doubt as a result, it is wise to plan for the potential wind down of the business while there is time to do so with a particular focus on reducing liability for the owners and management.   You should consult legal counsel promptly to assess the business’s options; it is never too early to have that conversation, but delay could reduce your options or the range of outcomes.

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