Surviving the Downturn: Addressing Debts

Suttle & Stalnaker, PLLC is pleased to publish this four-part series providing guidance to the energy sector as we navigate the COVID-19 pandemic and beyond.

Tricia Clark, CPA
Energy Group Member

Here at Suttle & Stalnaker, we know what the recent market conditions and COVID-19 have done to your business operations. All sectors of the energy industry have been crippled by slowing demand and, in some cases, a significant reduction of revenue. In our previous article, we talked about reducing costs. This article will focus on what to do with addressing debts, whether with a financial institution or vendors.

Cash is always king, but as the stream dwindles, many of you are likely facing longer than average agings in your accounts payable and possible bank debt covenant conflicts.  Now, more than ever is the time that you need your CPA and need to revisit your projections and cash management. If you’ve followed Chris’ earlier article, you know there are ways to effectively manage costs that don’t cripple you.  Now the goal is to manage the expectations of those you owe money so that you can keep operating.

Some ideas to consider are:

Accounts Payable:  Don’t cherry-pick the vendors to pay, and leave the rest hanging.  While there is some support for keeping those paid who deliver the most important aspects to your production process, everyone deserves payment for what they have sold you.

Review your payables aging weekly, if not daily.  Categorize your vendors, identifying those essential to operations, and those that may be able to wait.  Then talk to them, and set up plans to get them paid and keep up service.  Options might include frequent partial payments, discounts if you can pay within a certain period, or discounts if you can pay them in full.    To aid in the assessment, develop a cash flow projection, and progress it weekly.  Use it to provide estimated payment amounts to those who are not getting a frequent payment.  While you may be afraid that if they know you are having cash flow problems, they will quit delivering, that will happen if you aren’t communicating a plan.

Depending on what the payable is for – you may also consider asking the vendor if they will take less than the total due.  Discounts and overall reductions may be welcomed to get something settled.

Bank Debt:  Two issues to consider with bank debt are the regular monthly payment and financial statement covenants that may have come along with it.  If you cannot make regular payments on your debts, ask your banker about interest-only payments for a set period of time, to let them know you are committed to making payments. You can also talk to them about renegotiating terms.  This is usually better received before you start missing payments.

Your covenants need to be monitored too, and if it appears you will not meet them, let your banker know earlier rather than later.  Modification requests are usually well-received before there is a problem.

Payroll Taxes:  Don’t fall behind on remitting your payroll taxes.  They are considered trust fund taxes and as an employer, you are entrusted to withhold them from your employees and remit them to the appropriate place.  They are not the property of the company to do anything else with.

If you do fall behind, catch up as soon as possible. If that is not possible, the IRS usually recommends depositing for the current period, and then staying current, and working with them on a payment plan for the older taxes.  If you don’t address the situation with them directly, any payment you make could get applied to the oldest period first, causing penalties to begin on payments that you think are caught up.  State tax agencies handle payroll taxes the same way.

Insurance Premiums:  Before letting your insurance lapse, see if you can reduce your premium by downsizing coverage or increasing deductibles.  You don’t want to operate without liability coverage. So be mindful of due dates for premiums and check with your agent on what can be done to reduce the cost.

In all the areas addressed above, the common theme is communication.  You must know where you stand financially, project your available cash, and communicate with your vendors/bankers on what you can do to get them paid.  Whether the market or a pandemic is the problem, there will eventually be a better day, and you want to be sure that you still doing business there when it happens.

In our next article in the “Surviving the Downturn” series, Tax and Consulting Member Miri Hunter will discuss employment issues – addressing layoffs, adhering to CARES and FFRCA regulations, and more.