Dispatch #46 - Chunks of Cash and Credit During COVID-19
These are strange times for managing cash. As CFO to multiple contractors, here’s a composite of how the various owners and I are thinking about the different chunks of cash and credit floating across their balance sheets.
When should we apply for PPP loan forgiveness? When we’ve optimized forgiveness, either within the 24-week window or at the end of the year if the headcount test leaves us short right now.
Should we take the EIDL loan? Yes. Park the money and revisit its use a year from now when repayments are set to begin. As a colleague wrote last week, “Think of this as a cheap business life insurance policy. If you don’t take it out now, and then the company gets sick later, it may not be there.”
Should we repay our line of credit? We maxed out our line of credit when the pandemic hit and we’re now paying hefty interest on idle funds. Should we pay it back? Possibly. But only if we can survive without it if our bank cancels or reduces our line of credit. Banks have started to restrict credit and we expect the trend to continue.
We’re sitting on more cash than ever; is it FDIC-insured? Up to $250,000 on deposit in each bank is FDIC-insured. We’re in a recession and there are legitimate concerns about bank health, but there’s also a countervailing view that the government will bail out banks as needed. As a hedge, we should protect more of our cash under FDIC. We can do so manually or through a network like Promontory.
Should we earn interest on our idle funds? Yes, if we don’t expect to use our emergency funds for at least 3-12 months. A 1% return won’t make or break our cash flow outlook, but why waste $250, $500, or $1000 per month?
What’s our target level of cash? Ideally, that number is 10% of annual revenue, plus a few business-specific considerations. We’ve set a bright line and if our 13-month cash forecast dips below it, it’s a yellow-flag signal that our cash management plan needs more work.
Need help with this or other financial matters faced by construction contractors? Let’s talk!
David Stern CFO makes every effort to provide useful and accurate information. This content, however, is not intended as a substitute for specific business-related financial advice. We disclaim all warranties and liabilities from its use.