Focus on cash flow and liquidity for COVID-19 resilience

In these uncertain times the cash and liquidity needs of a business are paramount. With the rising impact of COVID-19 being seen worldwide, all industries will face significant disruption to their supply chain, workforce and cashflow. The right response will depend on the specific circumstances you and your business face. However, when experiencing significant stress or distress, we recommend you focus everything you do around the management of cash.

Below five key considerations for businesses with cash management at the center. 

Cash Management: critical issue for businesses
In a volatile and slowing economy, getting an immediate handle on your daily cash needs is essential. Take a critical view of operations, review existing cash flow forecasting processes and understand how potential disruptions to operations may affect liquidity. Actions you can take: 

• stretch creditor payments;

• negotiate payment deferrals with landlords and banks where possible;

• sweep idle cash from other facilities into your working capital account, or draw down on availability in your banking facilities;

• negotiate with customers for them to pay early, offering a discount or other concession;

• explore tax concessions available;

• investigate available government support.

Short to medium term cash forecasting
Cash is king, therefore an understanding of your cash and working capital needs are essential. Now more than ever you should create a robust cash forecast: 

• Profit & Loss and cashflow should be integrated, and cash balances reconciled;

• Run scenario analyses on your financial and cash forecast and understand how that interacts with short-term liquidity needs;

• Look for opportunities to build a war chest of cash and investigate whether drawing down on credit facilities could be prudent for safeguarding your business;

• Strategically manage working capital. Take a critical look at working capital KPIs such as days payable outstanding and days sales outstanding and understand impact of stretching these days in either direction. Assess capital expenditure requirements and defer non-essential spending if possible.

Cost optimization
Maintaining your current or historical levels of profitability in an environment where supply and demand fundamentals are decreasing simultaneously can be difficult without closely analyzing spending:

• develop a strategy: do not execute cost-cutting initiatives  at the risk of compromising revenue generating capabilities or diminishing value.

• review fixed and variable costs carefully and determine what costs you need to run the business.

Contingency planning
Consider stock piling essential supplies and ensure alternative sources are identified. Establish staff support plans to allow essential employees to continue working. 

Consider whether part (or all) of your business should be suspended, and the implications in terms of deactivating equipment and dealing with live projects or work in progress. 

Look at the insurance cover you have and check whether you have a legitimate claim for the kind of disruption your business is currently facing. Similarly, check if a successful claim could be made against your business for the cancellation of services or goods.

Stakeholder management
Having a robust plan underpinned by strong financial forecast will give comfort and clarity to the stakeholders, thereby maximizing your opportunity to access the necessary funding.

Be proactive and engage with tax authorities, lenders, landlords and key suppliers to avoid missing out on financial and other support that may be available.

Evaluate customers and suppliers
In times of economic uncertainty, businesses could see increased pressure on the purchasing power and creditworthiness of customers while also facing tighter credit terms and product availability from suppliers.

• Re-evaluate credit terms with current customers, negotiate the shortest reasonable terms, and carefully review the creditworthiness of each new customer before extending credit.

• Continuously monitor accounts (receivables).

• Negotiate for the most favorable credit terms with suppliers and critically evaluate your supplier base.Communicate early and often with your lenders

Communicate with them early and often, explaining any situations that may arise and the actions you propose to address them. Transparency and open communication will serve you both well. Your existing lender could be your fastest source of additional liquidity.

• Evaluate potential covenant breaches;

• Conduct detailed modeling of your working capital facilities, particularly with asset-based loans;

• Stay current on your debt if possible and assess capital structure concerns;

Consider the flexibility you can deploy people into different
areas of your business. In many cases workforce solutions can be negotiated, and a big part of this is active engagement with people, unions and other employee representatives to explore what options can be accommodated for each business.
Engage with your legal advisers early will help. 

There is always going to be a sensitive balance between maintaining employment levels and the ultimate survival of the business. Set clear policies for absence, covering voluntarily absence and for situations where people are quarantined or unwell. Employees need to know where they stand and trust messages from their business leaders – tone, accuracy and relevance can make all the difference to behavior.

Setting up a crisis management team
Important to centralize information and communication with staff members and stakeholders. Communicate early, often and frankly with the team and reach out to staff members that are home. Lack of news breeds uncertainty and concern. 

In conclusion
The COVID-19 pandemic presents novel challenges and
a chaotic business environment. By focusing now on cash flow and liquidity, you can provide your business with the financial cushion and flexibility to weather the storm.