TIPS FOR DECISION MAKERS: SHIFTING THE FOCUS FROM PROFITABILITY TO SURVIVAL MODE DURING THE COVID-19 PANDEMIC (PART THREE)
WRITTEN BY JOSEPH J. BELLINGER
Joseph Bellinger has thirty years of experience as an attorney working in business bankruptcy cases, advising businesses on insolvency issues, restructurings, and workouts
A significant aspect of my work is advising small and mid-sized companies coping with financial distress. This is Part Three of a three-part series that describes some of the principles I have learned about the challenges faced by the decision-makers when their company is suddenly faced with financial distress. Of utmost importance is that the decision makers can make the paradigm shift from focusing on profitability to survival mode. This section provides a discussion of strategies for identifying expenses that might be deferred, reduced, discounted, or eliminated as part of a company’s survival plan.
.A company’s survival plan requires that decision makers scrutinize the company’s expenses, line by line, and for each expense item, consider whether that expense might be deferred, reduced, discounted, or eliminated. This review of expenses should be undertaken frequently, so that no cash is spent that could have been retained.
Vendors: With respect to vendors, rather than pay their invoices on their terms (i.e., net 30 days), consider stretching payment of vendors’ invoices out 60 days, or 90 days, depending on what the vendors will tolerate and continue to do business with the company. Communication with vendors generally will go a long way toward their tolerating slow payment of their invoices in order for the company to survive and remain a loyal and valuable customer.
Payroll: Perhaps the most difficult part of implementing the expense side of a “cash is king” strategy is the employees. Payroll is one of the company’s biggest recurring expenses. Decision makers must be dispassionate and objective when determining if it is feasible for the company to retain its entire staff during the survival period, or if furloughs or layoffs are the only way for the company to survive.
Contractual Payment Obligations: Several other recurring expenses are subject to contractual obligations, such as rent and equipment leases. Triggering a payment default might prove disruptive to the company’s operations, but the parties can negotiate temporary payment deferments or reduced payments to provide the company with relief on the expenses while precluding a contract default. Any such agreements should be put in writing and signed by the parties.
Bank loans: For debt service, decision makers must be sure to take advantage of all concessions made for payment of loans to banks. Converting monthly loan payments to interest only payments as a written modification to the loan keeps the company current on the loan obligations and substantially reduces the amount of the monthly payments.
The only way to keep a hole from getting deeper is to stop digging.
Individuals form legal entities to conduct their business in order to shield personal assets and income from the debts of the business. In general, the owners of a legal business entity are not liable for the business entity’s debts. When companies are suffering from a shortage of cash, owners may defer payment of the company’s taxes to retain cash in the company. Accrued, unpaid tax liabilities of a business entity are usually personal liabilities of the owners and possibly others who are deemed to be a person with sufficient control over the company’s cash management.
If a company is unable to pay its taxes as they come due even after adopting a survival mode budget, rather than taking actions that expose ownership and/or management to personal liability for the company’s debts, it may be time to stop digging.
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This is not intended as legal advice and readers are admonished not to consider the content as legal advice or as recommendations they should follow.