Key Areas of Action for Businesses to Remain Solvent through COVID-19

Key Areas of Action for Businesses to Remain Solvent through COVID-19

Licensed Insolvency Trustees have a wealth of experience and expertise in helping business owners get through turbulent times.

As professional advisors, we must leverage that experience and expertise to assist businesses negatively affected by COVID-19.  Our goals should be to help them remain solvent and/or return solvency, help them preserve their core strengths and help them maintain or even grow the value of their businesses.

The following are the key areas of action that we believe business owners should focus on while navigating through the COVID-19 crisis.  If you wish to discuss please call either Joe Albert or Bryan Gelman. 

Impact analysis: All companies should be continually analyzing and detailing the current and anticipated future impact of COVID-19 on their industry, competitors, customers, suppliers and their own business. This analysis should include:

a. Sales and marketing channels
b. Demand for the company’s products/services
c. Effect of regulatory restrictions
d. Probable impact of changes to behavioural norms
e. Restrictions on cross border trade and travel
f. Employee productivity affected by home office and restrictions on travel

The impact analysis will need to be updated regularly as circumstances change and new information becomes available.

Cash Conservation: Companies should consider all available options to increase cash-flow in the short-term, including:

a. Government assistance programs
b. Sale of redundant assets
c. Early payment discounts
d. Negotiated extension of credit terms with suppliers
e. Permanent and/or temporary layoff of non-essential employees
f. Temporary decrease in management remuneration
g. Equity injection
h. Rent deferrals for commercial premises and/or equipment leases

Business plans: Business owners may need assistance in developing a COVID-19 business plan which addresses the anticipated COVID-19 impacts, including:

a. changes to marketing methods
b. changes to product lines
c. impact on the generation of new business and effect on existing customers
d. effect on the supply chain
e. impact on employees, the work environment and productivity
f. impact on collection of current receivables and strategy to collect future sales
g. changes to payment policies and agreements with suppliers
h. requests for deferral or forgiveness of rent with landlords
i. strategies for dealing with slow moving, obsolete and perishable inventories
j. health and safety procedures

Cash Flow: More than ever, companies must forecast their cash flow needs. In the current environment, we recommend separate short-term, mid-term and long-term forecasts.

a. A short-term forecast will usually cover a 12 to 16 week period and be prepared in a format similar to the templates used in many BIA proposals and CCAA reorganizations. Ideally, the template should incorporate a roll-forward Sales and Accounts Receivable Forecast and a roll-forward Purchase and Inventory forecast where applicable for the business.
b. In cases where uncertain hypothetical assumptions can result in widely varying forecasts, alternative forecasts can be prepared that consider both “best case” and “worst case” assumptions.

Internal Controls: Business owners need to consider operational changes that may have impacted or compromised their internal controls and make any appropriate adjustments, including:

a. control of cash and other receipts and banking procedures
b. delegation of authorities
c. approvals, authorizations, and verifications
d. segregation of duties
e. security of assets
f. physical location of accounting records
g. timely updating of accounting records
h. timely review and reconciliation of bank accounts and of AR and AP subledgers to the general ledger

Requests for assistance from lenders and investors: There is a wide range of assistance that business owners may consider requesting from their lenders and/or investors:

a. Forbearance of covenant breaches
b. Extension of accounts receivable margin eligibility beyond 60 to 90 days
c. Increase to margin eligibility
d. Deferral of interest and/or principal payments
e. Extension of loan amortization terms
f. Adding previously ineligible assets into loan margin availability (e.g. raw materials or work in process)
g. Temporary or indefinite increase in lines of credit
h. New loans against unencumbered assets (e.g. – fixed assets)
i. Cash flow loan – short term or indefinite
j. Waiver or reduction in banking fees
k. Waiving business credit card minimum payments
l. Early withdrawal of GIC’s

It goes without saying that lenders and investors will react much more favourably to a concise, well thought out written presentation that includes some, if not all, of the following:

a. A summary of how COVID-19 has immediately impacted the business, industry, customers and competitors;
b. The business owner’s best estimate of what future impacts are likely;
c. Available options that the business owner has considered/implemented to increase cash flow;
d. A current business plan that factors in the known impacts and the best estimates of the uncertain impacts of COVID-19; and
e. A weekly short-term and monthly mid-term or long-term forecast.

If you wish to discuss please call either Joe Albert or Bryan Gelman.

About the Author:

Joe Albert is one of the founding principals of Albert Gelman Inc., having over 30 years of experience in insolvency, restructuring and turnarounds.

Over the course of his career, he has acted for numerous business owners spanning the gamut of the Canadian economy, as well as the majority of the Canadian Schedule “A” banks and numerous other lending and financial institutions.

Mr. Albert is a Chartered Professional Accountant and Licensed Insolvency Trustee and has a graduate diploma in Investigative and Forensic Accounting from the University of Toronto.