Strategies for Managing Your Forestry Business Cashflow During COVID-19

Given the current situation in the forest industry and the financial challenges business owners often face, many wonder what they should be doing with their cash in the bank. Among the most frequent questions clients ask me is, “who do I pay first?”

Let’s take a closer look at who should have priority and why — as well as the effects of equipment purchase effects on cash flow, techniques for planned shutdowns, the Canada Revenue Agency (CRA) and its impact and some tips on managing your cash flow.

Who Should I Pay First?

When cash is tight, your priority is to keep the equipment going; without that your cash flow ceases. Most contractors know you need to pay for fuel, wages and equipment before anything else. These are the big three of any contracting business.

You also need to know which commitments you’ve personally guaranteed and the impact of business debts should they default. If you’ve personally guaranteed a defaulted debt, you’ll be required to cover it with personal assets. You may have to sell personal assets to pay corporate debts — and it can affect your personal credit as well. If you have not personally guaranteed the debt, your business may be able to default with minimal effects on your personal finances.

Canada Revenue Agency

If you were to priority-rank your creditors, the CRA should be near the top of your list. The CRA has the authority to freeze your accounts and withdraw funds. It will not ask before doing so and can create serious cash flow issues if you’re behind on payments. It also can direct your customers to pay any outstanding debts or invoices to the CRA directly.

Also, the CRA considers certain debts such as GST and payroll remittances to be money held in trust for the government. As such, the debts may have to be assumed by directors should a business default on remittances. You need to treat these the same as the big three business expenses mentioned above.

Cash flow Management Tips

There are some simple strategies to create a better cash flow in your business:

Understand your cash flow needs

Using your sales and production forecasts and our 13-week running cash flow template as a guide, prepare weekly cash flow forecasts for at least the next three to eight months. This will help you understand your cash flow needs and determine how long your business can continue without burning through your working capital. Now you need to focus on strengthening cash flow.

Develop key supplier and customer engagement strategies

Identify all the customers and vendors who represent critical accounts. Reach out to those critical customers to understand how their needs have shifted.

Consider whether you need to adjust your sales channels. For example, some customers who were historically uncomfortable operating in a digital world may be changing their preferences. This is creating new business dynamics going forward.

To minimize supply chain disruptions, coordinate with key suppliers to ensure you can meet the needs of your critical accounts. Communication and collaboration are essential, so initiate discussions regarding your supply needs and their commitment to meeting these needs. Then create specific procedures to engage and retain these strategic partners.

To preserve cash flow gaps, manage payables carefully, prioritizing important strategic vendors when timing payments. For others, discuss flexible or extended payments.

Tap into government support programs

Now’s the time to maximize government grants, credits and other financial or worker support opportunities for your business.

The federal government announced new economic stabilization measures as part of its COVID-19 Economic Response Plan. These measures will provide up to $82 billion in direct support to Canadian workers and businesses. Some of the key measures for Canadian companies include:

Enhanced support through Export Development Canada (EDC) — The will provide qualifying Canadian companies with increased access to loans, guarantees and insurance policies.

Temporary wage subsidies for workers — The government will provide a temporary three-month wage subsidy to eligible employers facing revenue losses to help prevent layoffs.

This will be equal to 75 percent of remuneration paid during that period for any company that has seen a 30 percent decline in revenue.

Tax payment deferrals — The CRA is allowing all businesses to defer the payment of any income tax amounts owing on or after March 18, 2020 and before September 2020 until after August 31, 2020. The relief applies to both tax balances due and instalments under Part I of the Income Tax Act.

No interest or penalties will accumulate on these amounts during this period. As well, the CRA will not contact small or medium businesses to initiate any post-assessment GST / HST or income tax audits during this period. Business owners should consider using this tax relief to preserve cash flow or build capacity as needed.

New Business Credit Availability Program (BCAP) — EDC and the Business Development Bank of Canada (BDC) will provide more than $10 billion of additional financing to businesses facing economic challenges caused by COVID-19. The program helps Canadian businesses in all sectors and regions access credit through EDC, BDC and private sector lenders.

BDC relief measures for qualified businesses:

• Working capital loans of up to $2 million with flexible terms and payment postponements for up to six months for qualifying businesses.
• Postponement of payments for up to six months, free of charge, for existing BDC clients with total BDC loan commitment of $1 million or less
• Reduced rates on new eligible loans
• Additional BCAP measures, including industry specific support, to come

Export Development Canada

Contact EDC directly to speak with an advisor regarding potential support: [email protected], 1.888.220.0047 or 1.800.229.0575 or submit an inquiry online.

Equipment Purchases and Cash flow

Buying a new piece of gear is a regular occurrence in the industry. Most contractors consider the overall price of the machine and financing costs. Only some consider the impact on cash flow. The length of the term, timing of your skips and down payment all play a significant role.

You can decrease your business’ monthly cash requirements by lengthening the term of your purchase. The shorter the term, the quicker you’ll be required to pay off the purchase price. It will mean paying more interest, but a longer term can reduce your monthly cash outflow.

Timing your skip payments is always tricky and Mother Nature is becoming harder to predict. Try to base skip payment timing on your experience working in the areas you plan to log. This is further complicated when you are financing the equipment over, say, 5 years but only have 6 to 12 months of logging plans in front of you.

Try to minimize your down payments to ensure stable cash flow. Large up-front payments can create unnecessary burdens. The only time you may wish to increase your down payment to create a lower and more stable monthly payment. However, if this is the case, you need to step back and think: could this equipment earn enough to pay the monthly payment based on the minimum down payment?

Conclusion

Cash flow is tricky and should always be something you and your management focus on. Try to work on your cash flow using some of these tips. All strong businesses have good cash flow and use many of these strategies to maximize their opportunities of success.

Chris Duncan, CPA, CA, is a Business Advisor with MNP’s Private Enterprise group who specializes in serving real estate, construction and forestry businesses. He can be reached at 250.748.3761 or [email protected]

More information: bdc.ca/coronavirus