In the closing scenes of The Wizard of Oz, Glinda the Good tells the despairing Dorothy to click her heels together three times, while repeating, “there’s no place like home,” … and she will find herself there. In short order, Dorothy is magically transported back to Kansas and awakens from what Auntie Em and Uncle Henry assure Dorothy was just a bad dream.
We, unfortunately, are living no dream and we will not be returning to Kansas anytime soon.
The effects of the COVID crisis on businesses may be plotted on a bell curve. Some industries have been devastated and no meaningful return is expected in the short term (e.g. restaurant and entertainment).
Other industries are temporarily booming (e.g. food manufacturing and paper products), with production capacities strained and where, ironically, a return to some semblance of normal will represent welcome relief.
In the center of this bell curve are businesses in industries that have sustained great trauma but which will return. For such businesses, however, what that “return” will look like is uncertain.
Some readers have had experience managing clients through turnaround situations. Workout professionals, in fact, are quite adept at right-siding businesses experiencing liquidity issues due to poor management or unfortunate events. Some of those same tools will be useful in helping guide some of these businesses in the middle of the curve to bluer skies. However, what is called for today is not turnaround management. It is crisis management.
Unlike turnaround situations, in a crisis, not only is the client’s business experiencing uncertainty, so too are the client’s commercial partners. For example, will the business’s lender continue to have an appetite for lending to the client’s industry? Will trade creditors be willing to extend trade credit for new business before receiving payment on pre-crisis trade debt? Will customers, also suffering liquidity issues, be creditworthy going forward? Will there be reliable governmental assistance? Will employees be willing to return to work?
Abraham Lincoln’s oft-quoted line, “The best way to predict [one’s] future is to create it,” fits our time in a highly pragmatic way. Indeed, the future for many of our clients will need be created through collaboration with trade partners and others in novel ways.
Access to trade credit will be of paramount importance to these businesses moving forward. Collaboration will be required of all interconnected parties in a way which recognizes the common interest shared by those in the same stream of commerce (e.g. vendor–manufacturer–
The very essence of the communication between the parties will be required to change fundamentally from a “you versus me” contest to an “us versus the universe” collaboration. Such a collaboration will require prudent patience and cooperation on the part of all stakeholders.
As in normal times, credit will gravitate to those who can: (i) show that, through thoughtful analysis, the scope of their capital requirements are properly understood; (ii) articulate the use to which the capital will applied; and, (iii) illustrate how the capital will be repaid.
How might you, as trusted advisor, assist? Perhaps by encouraging and facilitating the following:
1. Preparation of a Forecasting Template. That 13-week cash flow you read about earlier in the crisis should be converted into a template which will forecast the coming eight weeks, and then the ten months following.
2. Quantification of Lost Liquidity. Help your clients to understand and quantify the trauma sustained by their businesses during lock-down in terms of lost liquidity. This will be an important variable to the algebra of calculating capital need.
3. Forecasting of Working Capital Requirements. Difficult though it may be, your clients will need to forecast the future return of business revenues. This process should not be done in the abstract, as is often the case when budgeting for the upcoming year. Rather, owners should reach out directly to major customers for the purpose of gathering market intelligence.
4. Performance of Sensitivity Analyses. Once a forecast has been made, “what if” scenarios should be considered. For example, what if we are 10% off forecast, 15%, or 20%, and what will the capital implications be?
5. Effective and Transparent Communication with Capital Sources. Once capital needs have been determined for pre-crisis debt, on the one hand, and for working capital needs, on the other, the task of funding the capital deficit must be considered. Tranches of capital will likely come from agreements with vendors, revised senior lending facilities, government subsidized loans, mezzanine financing, and finally, if necessary, equity infusion.
In addition to shepherding clients through the type of processes described, the trusted advisor should have a seat at the table in virtually every critical communication with their clients’ trade partners. The advisor likely has a superior ability to communicate the concepts and underlying rationales needed to be shared with trade partners in order to achieve compromises and concessions which, in a normal economy, might seem impractical.
The advisor’s presence in such a role will be comforting to clients as they engage in what for them is foreign behavior, and it will add credibility to the proposals being offered in the eyes of non-client participants.
What happens next for many of your clients will require more art than science. By engaging in aggressive analysis, applying well-reasoned assumptions, and having honest communication with all stakeholders, your clients will have the comfort of knowledge that they are doing the very best they can during this time of uncertainty.
Until next time, trusted advisor, remember, as Dorothy pointed out…”Somewhere over the rainbow, skies are blue…”