Addressing Cash Flow Needs in an Economic Downturn

Cash is king—and so is cash flow. Both can present challenges in the best of times, let alone during this COVID-19 pandemic. Unlike past periods of gradual slowing, this economic downturn was as sudden as it has been devastating, like switching off a light. The current downturn will affect all businesses. And among the greatest concerns of the business owners and operators we have talked with during this time of crisis are issues related to cash flow. While each business’s challenges are uniquely theirs, there are several broadly available, tried-and-true strategies for dealing with cash flow issues. Following is a list of recommendations we have been making to our business clients in recent consultations. We urge you to consult your HBK advisor to determine the most appropriate strategies for your business. LEVEL I Strategies:
  • Call your lenders (banks and finance companies).
    1. Discuss deferring your payments. Up to two to three months. An extended loan term will save cash now and help you get through the crisis.
    2. If deferral is not possible, ask about interest-only for two to three months.
    3. Or restructure the loan to extend its term and lower your monthly payment.
  • Call your local economic development agency. A government loan program could provide some relief. The loans may be state sponsored or from the Small Business Administration (SBA). You might find these loans to provide favorable terms or interest rates.
  • Restructure your payroll.
    1. If your business has slowed, you likely do not need as many employees. Consider terminations, layoffs or furloughs.
    2. Consult with your advisor about the recently passed stimulus legislation. It includes programs that offer loans to cover payroll; some offer loan forgiveness.
    3. Consider wage or salary reductions.
    4. Look at reducing contributions or matches to your employer-sponsored retirement plans.
  • Call your vendors.
    1. Ask to defer your payments. For example, stretch accounts payable from 30 to 45 days.
    2. Talk with your vendors about how they are handling the economic downturn and its impact on their cash flow.
  • Call your customers.
    1. You need to understand how your customers’ cash flow issues impact their ability to pay you. Better to understand their position and plan for it than wait and wonder why you aren’t being paid.
    2. You may want to consider requiring advance deposits or C.O.D. payments from customers with severe cash flow issues.
    3. Think about offering discounts for prompt payment. But before you do, make sure you understand the impact of the discounts on your bottom line versus borrowing from your line of credit.
  • Evaluate your business expenses. During good times many businesses increase discretionary spending. This is a good time to evaluate all your expenses and determine what can be eliminated or reduced.
  • Another way to free up cash is to look for opportunities to reduce working capital. Working capital is the difference between a company’s current assets and liabilities. Managing involves reducing current assets, such as inventories, and addressing trade receivables and trade credit. Lowering inventories and aggressively managing accounts receivable will improve your cash flow.
  • Sell “lazy” assets, that is, assets that are not being used or are used sparingly, such as equipment not currently in use or that hasn’t been used in some time. Selling can turn those assets into cash; it can also reduce holding costs, including insurance on the equipment, maintenance and even utilities.
  • Check to see if your state is doing anything to provide relief. For example, during the current downturn some states are changing their sales tax prepayment requirements.
  • Crowd-sourcing allows others to contribute to or invest in your business. This is not a commonly employed strategy, but if you want to pursue it, make sure you understand the related obligations. You’ll find information about crowdsourcing at,, and
  After you have explored these options, project your cash flow over the next 90 days or longer. Roll your projections forward weekly or monthly. If your cash flow is still negative, consider the following Level II strategies: LEVEL II Strategies:
  • Real estate: If you have equity in real estate (business or personal), you might want to consider tapping into it by remortgaging. Carefully consider the personal as well as financial ramifications of remortgaging a primary residence for money to put into your business.
  • Life insurance loans: Most whole life or universal life plans allow you to borrow against the cash surrender value.
  • Lines of credit: Consider maxing out your line of credit, especially if there is no borrowing base certificate required. If you have a “sweep” account, consider depositing the funds in a different bank to ensure they will be available when you need them. Use these funds sparingly.
  • Retirement plans: Borrowing from your retirement has been made easier by the CARES Act. You can borrow up to $100,000 penalty free, but only for tax year 2020. Be sure to talk to your advisor before you implement this strategy.
  LEVEL III strategies:
  • To save on payroll taxes and worker’s compensation insurance, consider replacing part of your owner’s salary with other ways to take cash:
    1. Repay shareholder loans if applicable.
    2. Increase the rent if you own your building and rent it to your business.
    3. Take distributions or draws. Be aware of your basis to ensure this is not a taxable event.
    4. Only employ these strategies if you are still taking reasonable compensation. The IRS has rules against unreasonably low owner’s compensation. Consult your tax advisor.
  • Apply for a low-interest or no-interest charge card that can be used for 12 to 18 months before the interest rate increases.
  • Sell or “factor” your accounts receivable. This is a costly option and should be employed only as a last resort.
  Strategies NOT to employ:
  • Not remitting payroll taxes: You could be left personally responsible for the taxes.
  • Not remitting sales taxes: As with payroll taxes, you could be left personally responsible for the taxes.
  • Not remitting retirement contributions: Failing to make your employees’ contributions will subject your business and you to what can be substantial IRS and DOL penalties.
  It is always important to project your business’s cash flow, but during times of economic slowdown, it is critical. But always consult your professional advisor before implementing a particular strategy. We’re here to help. To discuss your cash flow issues, contact HBK CPAs & Consultants at 814-336-1512 for advice and assistance. Or email me at:
About the Author(s)
Joseph Ledford is the Principal-in-Charge of the Meadville and Erie, Pennsylvania offices of HBK CPAs & Consultants and has been with the firm since 1986. He has extensive experience in the areas of business valuation, succession planning, tax planning, business consulting and retirement planning.
Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.