Preparing your family business to weather this virus

With the COVID-19 pandemic spreading across the country, uncertainty about the near-term future of our economy and businesses is becoming the new normal. The crisis is disrupting supply and demand chains across the entire economy. Financial markets are reeling and family-owned businesses are facing challenges like never before. In these unprecedented and uncertain times, family business owners, and their management teams must focus on protecting the value of the family enterprise while looking out for the well-being of employees and other stakeholders.

The Baker Tilly Center for Family Business Strategy suggests that family business leaders take the following actions to identify and prioritize near-term survival and eventual long-term success:

Assess your cash position

It is very probable that the current economic environment will result in less readily available capital. Federal, state and local authorities will likely offer access to emergency funding, but it is likely that banks will increase scrutiny on cash flow projections, business models and go-forward strategies.

As the economy continues to slow down amidst COVID-19, first and foremost, businesses need to understand their cash position and working capital needs, especially if there is a need to recapitalize the business. Having a detailed cash-flow analysis will help you answer key-planning questions, such as:

  • How far can our current cash flow position extend ongoing operations?
  • How do we triage expenses?
  • When may we need to implement changes to our workforce?
  • Do we need to manage our non-essential suppliers differently?
  • When do we approach our bank for debt leniency?
  • When do we discuss flexibility with our landlord?
  • When do approach our investors for more capital?
  • When do we apply for government assistance?

We have developed a 13-week cash flow modeling tool that will provide a detailed view of cash inflows, outflows and the ability to meet obligations as they come due. The model enables management, lenders and investors to make decisions impacting immediate and near term cash flows.

For many businesses, 13 weeks represents a trip around the operating cash cycle and provides a detailed view of cash inflows, outflows and the ability to meet obligations as they come due. The answer of where cash is produced and consumed, and the resulting expected cash position, is analyzed in weekly detail over the 13 weeks. It will highlight areas of cash shortfalls in advance, so you are prepared to act proactively.

The tool enables operational and capital decisions to be made with high degrees of confidence in situations of deteriorating business activity. This is especially relevant in our current environment, where uncertainty surrounding liquidity and solvency is leading to an acute need for visibility of cash availability to meet needs such as debt service, material purchases and payroll.

By taking a critical view of your operations, you can visualize how disruptions may affect cash and liquidity moving forward and consider other adjustments you may need to consider.

Learn more about our 13-week cash flow model

Adjust your business model

During a period of unpredictable revenue generation, the 13-week cash flow tool will allow you to take the appropriate actions and make the difficult decisions in order to adjust your business model to ensure financial viability during and after the crisis.

Some of these actions will be short-term and taken to align cash outflows with cash inflows. Short-term actions may include:

  • variable cost reductions and spending freezes
  • supplier terms negotiations
  • lender negotiations
  • landlord negotiations
  • temporary reductions in force
  • customer credits and discounts

Other decisions may take longer to implement, but will be important for the ongoing future viability of the business. The longer-term decisions may include:

  • rationalizing facilities to reduce fixed costs
  • de-risking the supply chain
  • right-sizing the organization and workforce to align with the current economic reality
  • focusing on core businesses and shuttering marginal non-core businesses
  • delaying investment in growth strategies,
  • applying for federal, state and local stimulus programs/loans

Aligning the business model to reduce cost, mitigate risk and improve efficiencies to reflect the realities of the marketplace will improve the likelihood of weathering the storm and preserving the value of the family business.

Revise your strategy for the current and potential market environment?

The crisis-driven market uncertainty, forced shutdowns and travel bans, have reduced demand for goods and services in many industries. Additionally, social distancing and quarantining has created disruptions in the ability to deliver in the value chain. The speed and extent of the demand recovery will be driven by a multitude of factors including, the speed of containment of the virus in the US, globally and the extent of the potential recession.

Every business, including family-owned businesses, must revisit their current strategic plans. Most companies have built their strategies on a set of assumptions that included sustained economic growth, availability of capital, tight labor markets and other market factors that have been consistent over the last three years. It is not hyperbole to suggest that these assumptions can be thrown out the window. A new set of assumptions about the macro-economic market must be developed in anticipation of quickly revising the strategy of your family business.

Since nobody can predict what will happen next, we recommend developing a few strategic scenarios based upon what could happen in the economy going forward. The scenarios should be defined by a set of key criteria. The criteria should include revenue, profitability, cash flow, cash balance, utilization thresholds, access to credit/capital, market-related restrictions or relaxations, general economic environment, material changes to supply chains, distribution channels, customers and demand, availability and capacity of human capital. Triggers should also be defined for each strategy. Scenarios should be implemented when key assumptions are triggered.

Now is not the time for a lengthy strategic planning process! Family business ownership and leadership must address defining the assumption set, developing potential scenarios, and revising the strategy quickly and thoughtfully.

Historically, family businesses have been able to weather financial crises due to the built-in competitive advantages of the family ownership structure and culture. These advantages include:

  • long-term time horizon
  • committed ownership
  • family value system that oftentimes includes a commitment to longevity and preserving generational legacy
  • deep and long-term relationships with suppliers and customers
  • strong commitment to the employee “family”

Unfortunately, these differentiators may not ensure survival during these trying times. The crisis demands leadership, attention to the emotional needs of the family and employees as well as a well-crafted strategy.

Our message to family businesses is to act now and stay resilient by:

  • Assessing your cash flow position
  • Adjusting your business model
  • Revising your strategy
The Center for Family Business Strategy in conjunction with other Baker Tilly’s accounting and advisory professionals are ready to help you prioritize necessary actions. We have developed a series of specific solutions designed to help you navigate your business in these difficult times. Please check out our recently built financial resilience solutions for more information.

View more COVID-19 resources for your family business

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For more information on this topic, or to learn how Baker Tilly specialists can help,  contact our team.

Gary A. Plaster
Principal, MBA
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