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In an unprecedented manner, the world economy has unilaterally greatly reduced its industrial and economic output as a result of the Coronavirus pandemic (COVID-19). To help you through some of the unknowns and difficulties this created, Gettry Marcus CPA, P.C. has launched a COVID-19 crisis advisory task force to help provide insight on how your businesses might need to react to this sudden health and economic global crisis. We have a host of thoughts to help you manage through this great unknown and will introduce them by segments.

This is the first of many communications you shall receive from the task force. We encourage your input and questions.

Maximize Customer Liquidity

In the past sharp downturns of the economy, not enough attention was devoted to an enterprises customer’s financial status until it was too late to be proactively prudent – in other words, the horses were out of the barn and the energy to coral them becomes exponentially financially exhausting. Accordingly, consider the following policies:

• Immediately reconsider what is considered to be a current receivable. Change your review and dunning practices from 0 to 30 days (if that was your first bracket) to -say- 0 to 7 days. In due course, you will be able to recalibrate what the new normal should be.
• Change terms on new orders from 30 days to something more manageable in these times to -say- 10 days. Consider cash-on-delivery or letters of credit for certain customers.
• Watch the overall credit limit by customer. For example, if a customer has an overall credit limit of $500,000, consider reducing it to a more risk-tolerant level. Revisit internal controls to ensure that this threshold, as well as other controls put into place, are complied with by all.
• Some businesses ship or do business with the same customer through two or more billing systems and/or two or more entities. Ensure that credit terms are consistently applied and that the credit extended is measured on a combined basis.
• Obtain recent and periodic financial statements from your customers to gauge their financial condition and changes thereto. 
• Pay attention to promises made and not kept. If a customer promised payment on a certain date and it is not received, it could be a sign of more significant issues that might be occurring with that customer.
• Watch for bankruptcy filings of your customers as these can occur quickly for a once seemingly healthy enterprise. If you have a customer where the officers have resigned, it is a clear signal that a chapter 7 or 11 filing, if not already in place, will occur shortly. If you suspect any such filing may occur, consult with counsel before conducting any further business with such customer.
• A poorly performing customer will not be alone. Chart the industries and/or regions your customers are in (if diverse) and understand which of those industries and/or regions have been more adversely impacted more than the others – react accordingly.
• Find out if your customer is still open. Ask about their operations and their supply chains.
• Investigate alternative methods in shipping your product in the event your sell-side supply chain is disrupted. Alternative paths may need to be explored at, of course, additional costs. In this regard, consider providing for transportation surcharge clauses if you are impacted in the buy-side and/or sell-side supply chain disruptions. Examples are:
  • Possibility that the ports in Southern California may not be accessible 
  • What if normal air freight carriers need to close down for a period of time.

• Watch for increases in minor damage returns or increases in demands to return unsold products as signs of customer weakness. 
• You must gauge your pricing power and will have several hard decisions to make in this regard.
• Should your accounting office become closed, have you considered how cash collections are to be processed and applied and how will billings occur.
• If you have a credit manager that has very good skills, keep him/her. In the financial crisis of 2008, businesses were shedding overhead and considered this overhead. A good credit manager generally earns their keep and those businesses that terminated their credit managers to save overhead, suffered during the economic recovery as these individuals were hard to replace.

The above thoughts are just certain considerations a business should consider immediately. There are many more not provided above and if a longer recession occurs, there are different cycles and strategies that must change as well. 

By Eric Lerner, CPA, Director of Quality Control
March 20, 2020

If you would like additional information please contact your Gettry Marcus Advisor or Eric Lerner, the author of this article.