Cash is King – Construction and Real Estate Concerns in the COVID-19 World

We are certainly living in uncertain and unusual times; however, there are sound methods that contractors, developers and property managers can use to preserve cash, speed up the cash collection process, delay payments and seek optimal options for debt. Such options for construction and real estate entities are listed below.

1. Small Business Association (SBA) loan relief program

On March 27, U.S. Treasury Secretary Mnuchin stated that every Federal Deposit Insurance Corporation (FDIC) insured bank will be able to make these loans. Secretary Mnuchin also stated that the banks should be ready by April 3. It is in bankers’ best interest to support these requests and help their current customers. If the loan proceeds are used for approved expenses, such as payroll, the loan can be forgiven. Consider contacting your banker to be placed in the queue for approval. DHG also has a team ready to assist you with SBA loan documents.

2. Families First Coronavirus Response Act

With some restrictions, the Act allows employers to claim a credit on payroll taxes for the cost of sick pay and emergency family and medical leave.

3. Real estate owners

Be aware that your tenants may be struggling and applying for SBA relief loans, so discuss with your banker any strategies to handle a potential decrease of cash flow.

4. Contracting and invoicing

Now is the time to be intentional, strategic and efficient in expediting contracts and billing. Consider billing ahead for stored materials as your contract allows.

5. Collections and receivables

Accounting staff should be analyzing old and aged accounts receivable and requesting payment.

Consider offering certain discounts to entice your clients to pay early.

If you have customers that cannot pay, you should contact your attorney to discuss filing a mechanic’s lien or work out another amenable course of action.

6. Focus on the right projects

Ask questions that will help you determine which projects require your focus and attention. Which job sites can you access? Which customers are most likely able to pay? Which projects have funding in place with a strong bank? Should you stop working on unprofitable projects?

7. Review contractual obligations

Consult your legal team on specific contractual obligation requirements, including pandemic provisions.

8. Debt and line of credit

Keep your lender informed and avoid surprises and develop a plan to manage any challenges.

Review leases and loan agreements.

Slow down payments to the extent possible to non-critical vendors and prioritize payments to vendors if they are critical suppliers or there is a personal guarantee.

Consider drawing on the line of credit versus utilizing cash.

9. Supply chain and inventory

Adjust inventory levels to the new normal, even if temporarily. You may need to balance the need for inventory cushion with the amount of working capital that is tied up.

Talk to your key suppliers to confirm you understand any supply chain disruptions.

10. Expenses

Manage supplier credit terms. Refrain from paying early if there is no financial incentive.

Secure supplier rebates, if available.

Make sure there are preferred vendors and backup vendors for major materials or services. Consider negotiations where appropriate.

Extend payment terms or request discounts from suppliers and vendors.

Ask all managers to perform an expense line item analysis.

Consider freezing overtime and hiring.

Consider having a three- or four-stage plan in place for cutting overhead and expenses, including triggers and strategy to implement and drive each phase of the plan.

11. Tax

Evaluate estimated tax status with your trusted advisor. The first two quarters of 2020 may result in very low or perhaps no profitability. You may be able to hold some cash you otherwise thought might have to be paid to the taxing authorities.

Visit the DHG COVID-19 web page for updates to tax law changes regarding advantages of opportunities from the government stimulus.

Evaluate the amount of distributions being taken out of the business.

12. Investments

Consider discussions with wealth advisors on the right strategy approach.

Consider if you can make a claim against your captive insurer for business interruption.

Consider the opportunity to take a loan as well as advance or distribute from your reinsurance company(ies) or other investment options.

13. Capital expenditures and special projects

Consider halting or at least evaluating all significant capital expenditures and special projects.

14. Talent

Consider focusing on your top 25 percent talent pool to have them ready and prepared if current situations change or improve.

CONCLUSION

In uncertain times, the low-hanging fruit or the basic blocking and tackling can help locate cash quickly. Most of the points mentioned above should be items of continual focus but may easily be forgotten when business is going well. Paying attention to these items today is critical now as you conduct business during the impact and effects of COVID-19.

For more information, visit DHG Construction and Real Estate, or contact info@dhg.com.