- April 7, 2020
- Posted by: Jason Schilling
- Category: Accounting & Bookkeeping, Business Management, COVID-19 Updates
The economic fallout from the coronavirus (COVID-19) pandemic has forced business owners to reevaluate their operations and make difficult decisions. One place to look for the information you need to make rational, reasonable moves is your financial statements. Under U.S. Generally Accepted Accounting Principles, these typically comprise a statement of cash flows, a balance sheet, income statement, and an equity statement.
A statement of cash flows should be organized into three sections: cash flows from operating, financing and investing activities. Ideally, a company generates enough cash from operations to cover its expenses.
For some businesses, the COVID-19 pandemic has caused revenue to drop precipitously without a proportionate decrease in certain (fixed) operating expenses. Companies should evaluate their cash usage needs in the short and intermediate terms. To generate additional cash flow, you may need to borrow money — consider a Small Business Administration loan, if you’re eligible. Potential longer term needs should be assessed as well.
Assets and Liabilities
Your balance sheet tallies your company’s assets, liabilities, and equity — creating a snapshot of its financial health on the statement date. Assets are typically listed in order of liquidity. Current assets (such as accounts receivable) are expected to be converted into cash within a year, while long-term assets (such as buildings and equipment) will be used to generate revenue beyond the next 12 months.
Similarly, liabilities are listed in order of maturity. Current liabilities (such as accounts payable) come due within a year, while long-term liabilities are payment obligations (such as term debt) that extend beyond the current year.
As its name indicates, the balance sheet must balance — that is, assets must equal liabilities plus Equity. Equity is the extent to which the book value of assets exceeds liabilities. In times of distress, certain assets (such as receivables, financial assets, and inventory) may need to be reduced for valuation or allowance purposes and potentially written-off. Intangible assets (such as customer lists and goodwill) may become impaired. These changes could cause the book value of a company’s equity to be negative (or a deficit), suggesting that the business may be insolvent, or require capital contributions.
Income and Overhead
An income statement shows revenue and expenses over the accounting period. Revenue has decreased for many businesses as the result of “Stay at Home” orders and social distancing during the COVID-19 outbreak. Certain variable expenses — such as materials and direct labor — have also fallen.
However, most fixed expenses — such as rent, interest, equipment leasing payments, insurance premiums, software expenses, and certain wages — are ongoing. Review costs that are categorized on the income statements as overhead and sales, general, and administrative expenses (SG&A). Consider whether you can scale back these items, renegotiate terms, or convert them into variable costs over the long run.
For example, you might return a leased copier that isn’t being used, decrease your insurance coverage, or rely more on independent contractors, rather than employees, for certain tasks. Automating certain processes or functions may yield long-term returns and short-term efficiencies.
Your existing financial statements may not account for the sudden changes inflicted upon businesses worldwide by COVID-19. It is important to consider your options carefully. CKCO advisors can assist you in evaluating them, gleaning insightful data using updated numbers, and generating new ones going forward.