Each day brings more clarity to the massive challenge integrators face: keeping businesses afloat and employees safe and healthy.
As we all navigate our way through this very unexpected crisis, NSCA’s goal is to provide you with guidance and resources to help you remain in business.
We’ve gathered a list of upcoming decisions that integration firm leaders will soon need to make – and what should be considered along the way.
Use of Federal Funding Sources
A surprising number of NSCA members refuse to investigate the relief being afforded to U.S. small businesses. Some don’t want the government involved in their business; others believe they won’t need or qualify for assistance. Many are worried they won’t be able to restore their workforce by June 30 to really benefit from CARES Act provisions. NSCA recommends that you apply today (April 3, 2020) for the best chances of receiving federal funding.
Deciding whether to utilize federal funding sources comes down to cash reserves and your debt profile prior to the pandemic. Some NSCA companies have a financial cushion that will sustain a massive loss of revenue and keep expenses as they are for months; based upon cash projections, however, others have a 30- to 60-day runway before becoming insolvent.
Do you go it alone, choose the path of forgivable bridge loans (grants), seek an SBA loan, or look to increase your existing line of credit? You need to decide soon.
Before you go any further: Make a decision about leveraging additional debt or taking a run at a forgivable grant. This decision requires you to be realistic about the collectable nature of your current receivables, whether work in progress can be completed and billed, and whether all other income sources are solid.
Conduct financial stress test exercises to determine the likelihood of that work being billable and collectable – and when that could happen based on access to sites, etc. NSCA is conducting stress tests for members on an individual basis to explain the DSO impact on borrowing base and unrestricted cashflow available that isn’t pleaded to any asset-based lending instrument.
Contact Your Local Bank
We hope you’ve called your current lender – or that they have contacted you. You may have already asked for a temporary release on the debt covenants and lending limits on 60-day accounts. If not, you may be surprised at how cooperative they will be, given the concerns they have about clients not being able to recover from a lack of liquidity.
Some lenders have been flexible and offer loan payment forbearance for 90 days – or interest-only payments. For credibility, however, you will need to create your recovery plan based on the stress test exercise to show how you will make it with a reduced workforce and a one-time injection of capital. The injection of capital, for example, would be for the lender to immediately lend additional funds against the AR at 60 to 90 days.
Workforce Reduction vs. Employee Retention
As you determine a strategy for applying for financial relief, you need to measure that strategy against the amount of funding you’re eligible to receive. Payroll levels, salary levels, percentage of reduction, and many other factors come into play. Start by calculating weekly/monthly revenue per full-time employee for all job function categories: sales, design, technical, install, services, etc.
Let’s assume that April’s earned revenues will be at 80% of original projections, May at 70%, June at 60%, and then the revenue stream stabilizes through year-end. At what point – and how deep – do you shed payroll and/or maintain payroll using the Paycheck Protection Program? How many scenarios should you run – and what datapoint will you use to make the most informed decision? Lots of emotion will go into this decision as you face reality and discover what these cuts may look like.
Non-Essential Expense Reduction
NSCA members that best understand this process are the same ones that suffered the most in the Great Recession of 2008 and 2009. Some of today’s most financially sound companies were the companies hit hardest back then. They maintained the conservative, lean spending habits they learned during the last major economic downturn.
While it’s up to you to determine which expenses are essential, I’d look carefully at retaining cash if discretionary expenses don’t have revenue or cost savings attached.
Now vs. 3 Months from Now
Use data, research, creativity, and accurate information from your client base to make these tough decisions. As you look over your backlog, WIP reports, AR, and DSO models, you need to establish the most accurate expected collection dates possible. Using June 30 as a target date, will you be able to restore employment to pre-crisis levels?
If you believe that revenue will be at 60% normalized levels, for example, then full employment is unrealistic. Does that mean you take a deeper cut sooner? This decision will drive the funding option that’s best for your situation.
Employee Retention Credit vs. Paycheck Protection Loan
If you do move forward with financial relief, a choice needs to be made. It’s one or the other – Employee Retention Credit or the Paycheck Protection Program – not both. If you seek relief from the Paycheck Protection Program, then you forgo the Employee Retention Credits. For most NSCA members, these loans can be forgivable; they use the prior year’s payroll calculations to provide funding equal to up to 2.5x your average monthly payroll expense.
Families First Coronavirus Response Act (FFCRA)
We’re still getting tons of questions about staff reduction. The new guidelines are very specific in terms of the modified accommodation and workarounds you need to understand.
A surprising number of employees are asking to be laid off to feel safer during the stay-at-home period, given the increase in duration and income they receive. In that case, their benefits will be provided through the unemployment office, not your company. On the flip side, furloughs are a way to give paid or unpaid time off without losing benefits. It could also be a reduction in hours aligned with projected workloads.
A layoff and termination are essentially the same thing when it comes to the benefits that former employees are entitled to. The U.S. Department of Labor created FAQs that provide guidance on this.
Cashflow and Access to Other Forms of Liquidity
We have continuously emphasized the importance of available and unrestricted cash to withstand this crisis. Preparing a declining revenue forecast model would allow you to back into the cash burn rates and give you actual data to take to your lenders and vendors.
Knowing how much cash you need – and when you need it – will be paramount to staying in business over the duration of this pandemic and for the recovery period that follows.
This crisis will pass. We don’t know when but, until it does, cash is king! –Chuck Wilson, NSCA Executive Director