Cash Flow Management & Credit Access During the Pandemic

Tuesday, March 24, 2020; 4pm-5pm

Cash Flow Management & Credit Access During the Pandemic

Panelists: Steve LeFever

Webinar Summary –

ProfitMastery CEO Steve LeFever guided this webinar on the details of developing and enacting a concrete financial action plan for franchisors and franchisees alike, who are under stress from COVID-19-related cash flow and credit access strains. LeFever stressed the need for every business to undergo a balance sheet assessment of their solvency/working capital, liquidity, and leverage/risk to determine business health and create an ongoing financial report card. LeFever also provided step-by-step instructions for businesses to determine the now-critical cash flow burn rate, and guidance on how to lengthen businesses’ cash runway in times of financial stress.

Key Bullets –

• We learn the most about running a business in bad times, not in good times
• Undergo a Balance Sheet Assessment: determine solvency, liquidity, and leverage – look under the hood of your financials to determine debt and cash levels
• Given altered revenue patterns due to COVID-19, look at cash flow burn rate to assess how much cash on hand your business has
• Identify your cash runway i.e. how long your cash on hand will last
• With burn rate and cash runway understood and in hand, identify a plan to meet your business’s needs given obligations and time windows
• Undertake a one-time financial report card, and update these metrics as conditions change

Full Bullets -

• Learn the most about running a business in bad times, rather than good times
• LeFever’s firm focuses on the financial side of franchise businesses
• Understand balance sheet ratios – cash is king and you need to accumulate it
• Health crisis that has morphed into an economic crisis
• Primary financial concerns for business owners –
  • Can biz survive
  • Employees?
  • How will I pay the mortgage
• What can businesses do immediately?
  • Self-quarantine à self-assess
  • Determine the lay of the land
• What management action you can take in the near term re: survival of business

Balance Sheet assessment:

• Solvency/Working Capital

• Liquidity
• Leverage/risk

Burn rate/cash flow

• Seldom used metric; now critical

Management actions

• Decrease burn rate
• Increase cash availability

Making metrics matter  - go inside your balance sheets and determine whether you’re overextended in debt and how much cash you have on hand

Financial report card = numbers of the business

Roughly 10% or less use something like a financial report card. If you don’t know where you are, then you will have a hard time tracking where you’re going

Solvency/working capital

• If you’re out of working capital, you’re functionally insolvent
• Current ratio measures your ability to pay your bills
• Driven by working capital cycle – Cash-à Inventory à Accounts Receivable à Cash
• Improve solvency by accelerating the cycle
• Bankers target 2:1

Liquidity/Cash Flow

• Measures ability to generate cash
• Used in conjunction with Burn Rate, it will assess survivability
• May have impact in lending decisions
• Looking to US Banking industry to step up for lending
• Bankers rule of thumb 1:1

Leverage/Debt/Risk

• Commonly known as debt-to-equity
• Measure of capital structure – more debt = more risk
• Current debt will typically be a factor in both loan decisions – interest rate

Burn Rate/Cash Flow

• Making Metrics Matter
• Burn Rate = rate at which company consumes its cash reserves; a measure of net negative cash flow
• Associated with start up businesses who burn through capital faster than they can turn profit
• Critical to franchisees and franchisors because revenue patterns have been altered in the environment
  • Businesses look to available cash for survival
• Gross Burn Rate = Cash ÷ monthly operating expenses
• Net burn rate = cash ÷ monthly operating losses…presuming expenses in excess of revenue
• Companies not operating use gross burn rate, companies operating will use net burn rate
• Cash Runway – how long your cash will last at the current burn rate
  • Cash runway = total cash reserve ÷ burn rate
• Adding one more core metric to the financial report card
• GOAL: increase your cash runway
  • Too much burden needs a longer runway
  • Decrease your burn rate OR
  • Increase cash availability
• Options to increase your cash runway
  • Reduce payroll
  • Reduce fixed costs (rent, etc.)
  • Defer expenses
  • Ditch unprofitable revenue streams
  • Pay bills slower
  • Sell off or return excess inventory
  • Consider using a factor
  • Hold off on major purchases
  • Increase revenue
  • Bill sooner and collect faster
  • Refinance debts
  • Encourage cash sales
  • Raise additional funds
• Funding options – explore IFA webinars; SBA disaster relief funds and other low interest loans
  • Grant money available and will go to deserving businesses

• Know your numbers – Make Metrics Matter
  • Opportunity for you as a franchisor to teach and communicate with your franchisees
  • Build a company scorecard
  • Assess the balance sheet
  • Calculate the cash burn rate
  • Calculate your cash runway, once you’ve calculated the burn rate
  • If you have cash runway, use it
  • With above data, evaluate your management options – not all of these options are available to all businesses all the time
  • For franchisors: educate your network to know their numbers; not just a good thing to do, it’s a necessary thing to do
• Ability
  • Controlability
  • Profitability
  • Survivability
  • Sustainability

Contact your franchisor to discuss funding and development of operations going forward

How often would you recommend calculating burn rate and cash runway?

            Do it the first time and then calculate as cash inflows change and reduction. Do it once and then determine where you are over time

The action plan outlined can be put into place now