By Katie Krakowka

Small business owners everywhere are struggling to adapt to the new reality of COVID-19. And it is no wonder: the world changed overnight for us all. One evening we were living in a booming economy characterized by a rigorous housing market and low unemployment rate and the next morning we woke to empty restaurants and travel bans. Government has promised that economic help is on its way, but many business owners need to make hard choices right now as their revenue dries up.

As things change rapidly, we of course recommend following city, state, and federal guidelines that might be affecting your industry. Beyond regulations that may impact your ability to stay open, there are financial considerations to take into account.

The following steps are designed to help businesses in a cash crunch gather and assess the information necessary to make a plan to protect their assets and survive the impact of the current crisis.

STEP 1: Determine your revenue requirements per week and per month

Can your business support itself during this time? Are your revenues meeting your expenses on a weekly basis? Are you projecting sufficient revenue over the next month? Take a hard look at the expenses you are calculating—don’t forget to include your salary requirements and ongoing tax obligations like sales taxes. While it’s tempting to leave things out to make your situation look better on paper, now is the time for honesty so you can make the most informed decisions to protect your business and yourself in the long run.

If your business is meeting its ongoing expenses, continue to monitor your finances in weekly and monthly increments to make sure your financial prospects remain steady. If your business revenue is lagging, it’s time to look at adapting operations to reduce expenses, if possible. Be sure to project the financial impact of potential changes in weekly and monthly increments to account for expenses like monthly bills and debt service payments.

STEP 2: Plan for the Worst Case Scenario

After you’ve accounted for your business’s current financial needs and projected possible operational changes, it’s time to take a sharp turn and look at what you would need to reopen if your business must close during the pandemic. Knowing this upfront can help you establish boundaries on which resources and assets you can (and should) use to remain open now.

In the event of closure, how much money do you think your business will need to cover reopening costs before revenues will cover ongoing expenses? Look back to your original start up revenues and expenses to get an idea of how long this process might take, understanding that your business is now established and that your community will want to support you.

The answer here may be reassuring, or potentially daunting. Restaurants that have had to let their space go might be overwhelmed by the cost of securing and outfitting a new space, while someone like a photographer might find the costs of restarting business minimal. Either way, honestly documenting your expectations can help you make the most informed decisions about allocating resources.

STEP 3: Draft a list of creditors and prioritize them.

If your business is facing a cash crunch, you may not be able to afford to pay all of your creditors on time. Instead of simply paying bills as they become due, you should prioritize your debt to ensure you can keep up with your most essential creditors. To start, draft a list with at least the following three categories: 

1. SECURED business debt: examples include vehicle loans and property mortgages signed by the business. If your business signed the papers, and the lender has the right to come and seize property in the event of a payment default, the debt should be in this category.
2. UNSECURED business debt: examples include suppliers of raw materials that invoice your business and whom you pay in 30 days and employee wages.
3. Business debt SECURED BY PERSONAL ASSETS: examples include home mortgages which secure business loans.

Don’t forget that most businesses cannot directly pay the personal debts of a business owner without creating financial liability for both. For clarity on this issue, you should reach out to a professional for advice with your particular situation.

Once you have a complete list, rank them all in order of which payments must remain current to keep your doors open, and which payments can be delayed. If you do need to delay or reduce payments, be sure to call your creditors to discuss the situation first. It is better to let them know what is going on and ask for help than to try and negotiate with an angry lender later. 

STEP 4: Identify available sources of cash.

If your business has been impacted by the pandemic, it’s likely you have already tapped into some of your cash reserves to cover ongoing expenses. Now is the time to quantify how much cash, or assets that can be liquidated into cash, you have immediately available to you. Add up the amount you have in reserve along with the value of liquidable assets like property equity.

You should not include sources of value unless you are willing to put them at risk. For example, you may be willing to borrow against the available equity in your commercial property to provide cash for business operations, but you may not be willing to borrow against the equity in your home or liquidate your retirement account for the same purpose. It is important to set boundaries based on what assets you can part with, and which you must protect.

STEP 5: Form a Plan

Use all of this data to map out how you’ll fund your business. If you have identified operation changes to reduce expenses in step one, now is the time to implement them. If revenue still can’t meet your expenses, move on to your prioritized list of payments in step three and to your available sources of cash in step four to cover the difference. Remember to protect enough cash and other sources of value to provide the start up money you quantified in step two should closing your business become necessary. 

Whatever plan you create is a short term solution to the current crisis. The goal is to buy your business time so it can survive until a recovery in the economy and access  government programs can help you dig out. If you need more cash than your plan can afford, it’s time to consult a professional for advice about permanent ways to safeguard your business and personal assets.