The COVID-19 virus has created an economic crisis that is unique. While many have seen a financial crisis before, we have not seen one that has touched so many components of the economy. During the downturns we saw during the early 2000s, there were large areas of the economy that were left untouched. Because of the vast swaths of the economy that this has affected, business owners must be proactive in assessing and addressing their capital needs. Those that aren’t will find their options are severely limited.
The Harvard Business Review wrote an excellent article, A Primer on Restructuring Your Company’s Finances. The article reviews the most common options available to a business and walks through the definition of each. A business owner of any size could consider most of the options detailed in this article.
The article states that “many companies will find that their liquidity needs, combined with continued earnings pressure, will render their current highly leveraged capital structures untenable.” In other words, businesses will need to find a way to satisfy their obligations while creating additional cash now.
Restructuring is a process of renegotiating a business’s key contacts. These can include employee and supplier contracts along with financial agreements such as loans, stock agreements, and leases.
Intuitively, most business owners are aware if there is a need for restructuring their obligations. What to do once you have had this realization is the next question.
A business owner who does not have the benefit of a full-time accounting and finance team might ask where to start. Business owners that have a bookkeeper and outsourced CFO have a leg up on others. These two individuals are vital in determining a restructuring strategy that will help the business now and long term.
Bookkeepers are Vital When Restructuring
I recently sat down with a business owner to review their monthly financial report, which we put together for them. Before we began, the owner commented, “This is the time of the month I look least forward to.”
It’s not that he dreads our meeting so much, instead, looking at the results these past few months can bring all sorts of emotions, most not good.
This specific owner we are currently working on a few of the different strategies described in the Harvard Business Review article noted earlier. However, it is precisely because of these financial statements that we can have these discussions.
Imagine being a boat captain, and all of a sudden, you see a massive storm ahead. As the captain, you can see that you need to adjust your course. However, if you didn’t have a map, you wouldn’t know where to go. For a business, without having a firm understanding of the numbers, it is tough to adjust.
In this example, the bookkeeper is our map maker. A bookkeeper helps a business compile all of the information so they can determine where the strengths and weaknesses may be. Without having a solid set of numbers to start with, any restructuring process will not be beneficial.
CFOs – They Key To Restructuring
The restructuring process requires budgeting, modeling, and planning. For instance, what happens over the next five years if we adjust a lease? Would changing a lease just create more problems further down the road?
The answers to these types of questions are essential for a business owner to know. However, it is equally critical for a virtual CFO to be able to explain the story to all stakeholders. Let me give an example.
Earlier this year, Krieger Analytics helped one of our virtual CFO clients exit a lease. This particular concept had three stores open, and one of them was struggling even before COVID hit. Very early on, we were able to see that this store would not be able to make it. In this particular case, two of the stores were owned by the same landlord. We were able to make the financial case to the landlord that by keeping the struggling store open and paying rent, it very likely put at risk both of the stores under lease with them. Rather than having just the one open space, the landlord faced the risk of having two open retail spaces (yikes!). As such, we were able to renegotiate both leases.
Leases are only one aspect of restructuring. The process needs to analyze all existing debts and commitments. It also needs to look at customers and brainstorm if there are ways to increase collections or sales. Lastly, the equity structure of the business may need to be analyzed. Is there a need for additional investment from current investors or to raise capital from new investors? Does it make sense to convert some of a company’s existing debt?
A CFO can help navigate all of these waters. Part of the value a virtual CFO brings is the knowledge of what is available. The phrase “you don’t know what you don’t know” rings true. There may be options that some business owners don’t know are available. These can include creative strategies or ways to approach various parties.
Once an outsourced CFO articulates the options available, they can go to work modeling what those strategies might mean for a business. By creating this financial clarity for all stakeholders, decisions can be reached quickly and relatively painlessly.
Next Steps
A lot of business owners are still in shock by the events that have unfolded over the past few months. I have a client in downtown Denver that thought once COVID started to recede in May, they were coming out of the woods. Then the protests hit. And when those were over, COVID was coming back strong for a second time. Its been a lot for any business owner to go through.
In order to survive, and potentially thrive, a business has to be operating with sound planning and strategy. Without this map, a business is just aimlessly making decisions. A bookkeeper is vital to providing the map. Only once you have the map, a CFO can start to discuss the strategies available and the short and long term impact of them. These resources will often pay for themselves, many times over. If you are business owner that is looking for options, now is the time to engage your team.
About Krieger Analytics
My name is Matt Krieger, and I am the founder of Krieger Analytics, an accounting and advisory partner for small businesses and franchisors. Our goal is to completely outsource your accounting department from virtual bookkeeping and virtual CFO advisory services. I am also the owner and franchisor of a concept called Monkey Bizness, in Denver, Colorado.
As a small business owner with a background in finance and strategy, I realized the benefits that a virtual CFO could bring to smaller organizations. Most franchisors and small business owners don’t have a need (or budget) for a full-time CFO or bookkeeper. To better fit my clients, Krieger Analytics is a part-time resource. While most think of CFO’s being involved in finance and accounting (we are), we are also involved in much more. We partner with clients by coaching, giving them clarity into their business, and creating growth strategies. Conversations are free, so don’t hesitate to reach out to me at [email protected]