Coronavirus: Steps to Take Now to Ensure Business Continuity
The Coronavirus (“COVID-19”) pandemic is wreaking havoc on global capital markets, and is causing unprecedented business, personal and professional challenges that are changing daily. We have provided relevant guidance and links to resources that are designed to keep our clients and friends up-to-date and informed in this rapidly changing business environment. Some of these are outlined below:
Taking Care of Your People
As the number of worldwide reported cases of COVID-19 continues to reach new heights, ensuring your employees can balance their own health and well-being as well as continue to manage professional and business demands is becoming a growing challenge.
In these uncertain times, employees are looking for guidance from employers, government and community leaders. Employers that provide frequent and ongoing communication that is consistent with health authorities’ policies will increase team engagement as many organizations begin to adapt to remote or virtual work environments.
Transitioning to a Remote Workforce
As organizations encourage their employees to practice social distancing, transitioning to a remote workforce environment adds additional complexities in effectively managing your business. There are numerous websites that provide insights to these issues, and Cherry Bekaert has published Practical Suggestions to Maximize Productivity When Working Remotely. Depending on the sector, businesses may need to reorganize teams and alter historical resource allocation plans to adapt to the new environment. As more organizations transition to a remote work environment, companies operating in segments such as Managed IT Services, Managed Security, Cloud Infrastructure, and Video Conferencing are already experiencing increased demand for their services.
Assessing Credit and Liquidity
To provide for short-term liquidity needs, businesses should consider drawing down revolving lines of credit and working capital lines. This will allow organizations to build cash resources that can be used to mitigate the inevitable cash flow slowdown that will begin to materialize in the coming weeks.
Lenders are already working aggressively to assess the expected financial implications COVID-19 will have on their loan portfolios, and private equity firms are making similar assessments for their portfolio companies. Both bank and non-bank lenders are already preparing for higher levels of covenant violations and credit defaults that are expected to surface in the coming weeks. Organizations with any degree of credit exposure should take proactive steps to communicate quickly and candidly with lenders. Ongoing and frequent communication will reduce guesswork from lenders in their evaluation of credit risk exposure related to your business.
If not already underway, businesses should immediately assess availability on credit lines subject to borrowing base limits. It would be prudent to use this time to assess how your borrowing base is projected to change over the coming months with development of updated financial projections and forecasts that model the anticipated impact COVID-19 will have on future operating results.
If your credit facilities contain covenant restrictions, it is critical these updated financial projections and forecasts illustrate whether your business will be able to comply with any covenant restrictions. Knowing the anticipated level of cushion within your loan covenants calculations provides businesses greater operating flexibility. For businesses that anticipate covenant violations, bank and non-bank lenders will appreciate advance notice about anticipated shortfalls.
Managing Working Capital
The old adage “cash is king” should be a central focus of day-to-day operations during these unprecedented times. Earnings become a secondary focus, as it is ultimately cash that allows organizations to pay vendors, make payroll and ultimately keep the company in operations. Management should communicate to its workforce that a primary operating focus will be to build cash reserves that will be used to weather the anticipated financial impact to businesses resulting from this pandemic.
For most companies, a primary source of cash comes from a combination of access to a line of credit and working capital (accounts receivable, inventory and accounts payable). In addition to drawing down credit lines, management should consider all other available working capital levers that can be pulled that will both generate cash and reduce an organization’s overall cash burn rate, thereby preserving cash reserves.
Steps for consideration may include:
- Accounts Receivable: Companies should contact large customers and develop a plan to monitor and ensure timely customer payments are received. Many times the squeaky wheel gets the grease, and constant communication with larger customers can mean timelier payments to your company. Consider offering discounts on accounts receivable balances to collect the cash faster. While this step could impact earnings, it will ensure a higher level of cash availability. Lastly, on new orders from customers, consider requiring advance deposits as a means of tying up less working capital in accounts receivable.
- Inventory: Management should consider cancelling open purchase orders with vendors in order to prevent inventory buildup during a potential slowdown in sales. Management should utilize inventory on hand and already paid for as the first source to manufacture or distribute its products. Review of daily backlogs assists in assessing whether future customer orders are being cancelled or are slowing, and this can be modeled into the overall demand forecast. Changes made now may not be felt for weeks, but continuing status quo may cause an inventory glut that could take months to convert into cash.
- Accounts Payable: Management should contact its vendors now to request extended payment terms or deferred payment plans as you navigate this uncertain time. Constant and open communication is critical during this time as your vendors will be trying to assess their own strategies and make assumptions about their customer base and who is positioned to handle this uncertain time. The more communication, the less ambiguity for your vendor. Now is not the time to “turtle up” as vendors can control your source of materials or services that may hamper your ability to return to profitability or normal operations.
- Rolling 13-Week Cash Flow Model: To assist executives managing through this time, organizations should build a rolling 13-week cash flow model to project when and how much cash will be needed to operate on a weekly basis. This model is fluid and is built on known cash outflows (payroll, vendor payments, debt payments, rent, etc.) offset by expected cash inflows (customer payments, customer deposits, etc.). The assumptions in this model should be adjusted on a weekly basis as better information becomes available, including changes in accounts receivable days sales outstanding, negotiated deferrals on cash outflows (changes to days payable outstanding), deferred payment terms on debts, etc. This model provides management a projected cash shortage/surplus on a weekly basis and affords management time to adjust or manage changes in those cycles.
Utilizing Tax Credits for Small Employers
- On March 18, 2020, President Trump signed the Families First Coronavirus Response Act (“FFCRA”) into law. Beginning no later than April 2, 2020, and continuing through December 31, 2020, the FFCRA mandates family medical and sick leave payments for individuals affected by COVID-19 to be paid by employers with fewer than 500 employees. The three main components of the law are COVID-19 testing, paid Family and Medical Leave Act (“FMLA”), and paid sick leave for individuals affected by COVID-19.
- The FMLA has been temporarily expanded for employers with fewer than 500 employees to allow eligible employees up to 10 weeks of paid FMLA leave with a 10-day “waiting period” if they are unable to work or telework as a result of caring for a child whose school is closed or whose childcare provider is unavailable due to COVID-19. After the waiting period, the 10 weeks of leave will be paid at two-thirds the employee’s regular rate of compensation for the employee’s expected hours, capped at a maximum payment of $200 / day and a total payment of $10,000. Note that the employer can choose to pay more, but for purposes of determining the tax credit available, only the $200/day and total payment of $10,000 will be considered.
- In addition, the Emergency Paid Sick Leave Act will require small employers to provide paid sick leave to any employee unable to work or telework if the employee meets one of numerous criteria. Payments under this program are limited to $511 / day and $5,110 in total for quarantine, self-quarantine and those experiencing symptom and awaiting diagnosis, and $200 / day and $2,000 total for caring for others.
- For all the payments outlined above, the employer is entitled to refundable employment tax credits equal to 100 percent of these wages paid.
Considering Postponement of Income Tax Payments
- The IRS has postponed the due date of federal income tax returns originally due April 15, to July 15. Income tax payments due April 15 are also extended to July 15. The IRS previously placed limitations on the amount of tax that could be deferred until July 15, but those limitations have been eliminated. The payment relief also extends to estimated tax payments due April 15, whichare postponed to July 15. The second quarter estimated tax payments due June 15 are not extended. No interest or penalties will be charged on the deferral of the payments.
- Not all states have adopted these provisions. Some states have postponed the filing and/or payment deadlines, but are still charging interest on any taxes paid after the original due date.
- There are still many advantages to filing your return by April 15, including the ability to accelerate refunds, if applicable, receive important cash flow planning information, and potentially carry back losses if the current proposed legislation is ultimately enacted. Additionally, you can still file your federal return by April 15, but postpone the payment of any taxes until July 15.
Employing Advanced Cyber Tactics
Bad actors are using the near-panic environment to unleash new phishing campaigns intended to take advantage of the current state of fear and irrationality. As organizations transition to a remote workforce, their employees are anxious to get updates from their company, the government and the media. Bad threat actors are using these anxieties to legitimize their messages and prey on the fear of uncertainty.
Ongoing education to remain vigilant against attempts by bad actors to lure victims into these traps is an increasingly important risk management tool. The best ways to minimize cyber risk is to practice defense in depth. It is important to consider that combining your security and control practices can help reduce the risk around the loss of data. In addition to being skeptical and scrutinizing all messages for legitimacy, consider the following to help protect your organization, your data and your assets:
- Be sure to use only authorized remote access technology. Although there is sometimes a desperate need to get access to fulfill an obligation, refrain from using any remote access tool that has not been approved by your organization.
- Be aware of what information requires protection and what is needed to reinforce that protection while working remotely. Ensure your organization is using strong identity access management and multi-factor authentication.
- Ensure any mobile devices used are properly safeguarded with mobile device management (“MDM”) policies enforcing strong authentication and whole disk encryption, in addition to end point management policies, including proper patching, firewalls, anti-malware and web proxy protection.
- While many people will be working from home, ensure your employees are using secure communication when connecting from remote or untrusted networks. While home networks may appear to be secure, most personal networks are not equipped with the resources to monitor the environment the way an organization with a mature security program would. Consider the security of other devices connected to home networks (baby monitors, cameras, game console, TVs, Internet off Things (“IoT”) devices, guest access, etc.).
- Remember not to share systems or download sensitive information to personal systems or devices.
- Ensure your technology and security teams are capturing and monitoring all appropriate remote access activity. In the event of a compromise, having that information will be an important part of the security incident response program.
While there is no silver bullet to mitigate all your cyber risk, employing multiple protection strategies will certainly help keep you and your organization safe from these dynamic and evolving threats.
Ensuring Business Interruption Coverage
Commercial insurance policies may offer some relief to businesses that have been adversely affected due to ongoing restrictions by civil authority through government-mandated closures or disruption in their supply chain limiting the availability of manpower, raw materials and supplies necessary to conduct business. Business losses can encompass many things, including lost income, business closure, supply chain disruption, employee health benefit costs, contingent business interruption, extra expenses and cleanup/decontamination costs in the workplace.
Executives and their risk managers should scrutinize their insurance policies to evaluate what, if any, coverages and limits they may have in the event of a business income loss due to business interruption. It is imperative for businesses to establish a factual and chronological accounting of the financial impact the coronavirus has on its operations to support a claim. This includes maintaining a detailed log of events that adversely impact their business and segregating costs relating to the economic impact of the disruption.
Reviewing Government Actions and Other Resource Links
Even after the U.S. Federal Reserve’s actions on March 3, 2020, to reduce interest rates, it is expected the Fed will continue to utilize other proactive measures to ensure ample liquidity is available in the U.S. financial system and to try to elude the now-heightened risks of a recession.
The U.S. Government is rapidly developing and rolling out new programs and bailout initiatives that will provide emergency grants, loans, and tax relief to affected businesses across the country. On March 24, the White House and Senate agreed on a $2 trillion coronavirus stimulus bill to combat the U.S. economic fall-out associated with the pandemic.
Some links to resource centers and publications that will be helpful in monitoring ongoing COVID-19 developments:
