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Distributors Deal With Cash Flow During Slowdown
Electrical Distributors are telling the National Association of Electrical Distributors that one of the main fall-outs from the spread of COVID-19 across the country is cash flow issues. Many are concerned about meeting payroll weeks from now, in addition to receiving payment for products they have sold.
tED magazine talked with Joe Wagner, Managing Director at the investment banking firm PMCF about some tips to help during cash flow slowdowns. He started the conversation by saying, “I have been on the phone all week with clients. This is a big issue for them.”
Wagner says your first step is to check your balance sheet to see how strong it is and if you can ensure liquidity right now. After that, you need to start managing your accounts receivable. “Be careful because you don’t want to upset relationships,” Wagner advises. “The faster you collect receivables, the more cash you have.” But, Wagner also warns you are not alone in trying to collect money owed to you. “A lot of customers are doing what you are probably doing right now, which is extending payables. You should try to extend your payables, too.”
From there, Wagner says you need to manage your costs, starting with your variable costs. “That is very short-term in nature, and many companies are starting to do this,” Wagner reports. “Travel and entertainment are the first to go, and that is easy to control. When it comes to fixed costs, decide if you have to do something right away o fit you have a little cushion. Cutting back on people with terminations and layoffs is usually a last resort. But across the board salary reductions are possible. When you do that, you are letting employees know you are committed to saving jobs, even if it means you are sacrificing salaries.” Wagner also recommends pulling back on matching 401k contributions for the short-term, which is something he has heard is being used right now.
Wagner is keeping an eye on Congress, as it debates a bailout package for small businesses. “There is talk about a $300 billion stimulus deal where if you don’t lay anyone off, the loan is forgiven.”
But, Wagner advises while this shouldn’t impact long-term strategic acquisitions for most businesses, large capital investments in equipment (e.g., new racking) or systems (e.g., the latest ERP system) may be shelved until the market recovers. “If you had a healthy balance sheet going into this, you’re well positioned to weather the storm, but “nice to have” investments make sense to delay for a month or two.”
And when you are ready, you should begin preparing for the potential for any other disaster by looking at ways to outsource some of your fixed costs. “For the next cycle, how can you outsource a fixed cost into a variable cost, like transportation and delivery? That way, if there is a downturn, you don’t have to maintain a fleet of vehicles.”
Wagner also believes there will be other good news and bad news in the near future. “Back in 2008 and 2009, I think too many businesses were way too optimistic. I think we will get through this and it will be a little bit better than people think, but it might be a little longer recovering period than first thought,” Wagner said.Tagged with top 20