Risk Management and Cash Reserves

Written by Jim Skiera

This pandemic reminded me of the childhood story, The Grasshopper, and the Ant. As the story goes the grasshopper was the free spirit who was never concerned about what tomorrow will bring and lived in the moment. The ant to the contrary was busy preparing for the onset of winter storing food and supplies to get him through tougher times. Winter comes and the ant survives because he was prepared for the worst, and the grasshopper goes hungry and dies. The moral of the story as we were taught, those who do not plan for the long term will not succeed in the long term.

The pandemic has, as I am sure you have witnessed, caused unprepared businesses to fail. A key difference of businesses that have survived rather than failed is the practice of building and maintaining a cash reserve for times like these. Just like your safety program, company policies and procedures, training, hiring practices, workers compensation and other insurance, a cash reserve should be an integral part of your company’s risk management plan. If you have a reserve in place great; if this article will help you start one immediately.

Expenses – This sounds simple, however to accurately establish the amount of reserve needed for your company, you will need to spend time determining your on-going expenses. Your accounting system should allow you to look at your expenses for the past 6-12 months. As the tree care industry tends to be somewhat seasonal in many parts of the country, pay attention to how your expenses fluctuate month to month. If you have a significant difference, for example in the spring when expenses are high gearing up for the busy season, factor that into your planning. The purpose of the exercise is to make you aware of your financial needs throughout the year.

Risk Tolerance – With a firm understanding of your expenses, then determine your level of risk tolerance. It is recommended that companies have between three and six months of cash reserves available to cover expenses for unplanned downturns, other emergencies and or growth opportunities. This may seem like an unrealistic number; however, the last three months should now make you aware it is not out of line with the current reality. The true impact COVID-19 has on the economy and your business is likely not to be known for years to come.

Next sit down with your CPA and or financial consultant to determine the right reserve amount for your business. Speak to them about setting up a plan for your company to build the reserve over time, as it will impact your short-term cash flow. If you have a reserve that has been depleted, it’s time to structure a come-back plan. Based on the severity of this crisis you may want to revisit your risk tolerance level. Consider the impacts of possible future downturns in revenue and look for unnecessary expenses that can be shed until better times return so your reserve outlasts the crisis.

Financing Options – If you are like many businesses with little to no reserve, you may need to use financing to assist you with expenses for the short term. Your banker is another important adviser to help guide you. Ask about any financing options they have available to meet your immediate needs including Small Business Administration (SBA) loans and or lines of credit. A line of credit can be more difficult to set up, as it requires your company to meet the qualification minimums established by your bank, based on their lending level of risk.

Typical requirements include:
– A list of company assets and values
– At least two years of profitable operations
– Sufficient cash flow to cover financing
– Owners who have assets to put up as collateral themselves

SBA loans are an alternative for companies that cannot meet bank loan requirements. In response to this crisis, the government has established several additional new loan programs administered by the SBA. It is likely there will be more, so having a relationship with your banker to keep you abreast of these opportunities is critical. These loans are provided by banks in partnership with the SBA. Information about applying for SBA loans can be found on-line or provided by participating partner banks.

Now is a time to think like an ant. 

To learn more about how strategic planning can enhance your organization, take a look at our Thrive Risk Management Strategic Planning Package. In just 4 short weeks we can help you identify who you are as a company, what you want to become, and what strategic milestones will be needed to achieve your goals.