Cash Flow Management Strategies during Covid-19 – Let’s Sort Out the Challenge Together

COVID-19 took the world by utmost surprise. Currently more than 75 countries are now reporting positive cases of COVID-19 as the virus spreads globally impacting communities and ecosystems far beyond China. This fast-developing continually evolving Covid-19 pandemic has forced business owners to assess the state of their cash flow and make decisions to salvage through agile, clear and effective approach to strategic pricing.

It is quite inevitable that everyone will suffer losses one way or another in line with the economic downturn. In this circumstance it is important to manage liquidity and cash flow now taking uncertainties into account for future planning. There are immense risks amidst the disruption we are all experiencing but also new opportunities to serve Clients and position Company for post-pandemic success.

It is a crucial time for business leaders to navigate current situation carefully. There are below five areas to consider which will provide with current information, practical suggestions and helpful resources to keep business on a safe pathway through disruption and position it for accelerated success when the corona virus crisis has passed in the days to come.

Business Continuity–The Companies should reshape their strategy for business continuity in this crucial time. The Companies will want to instil short-term cash flow monitoring discipline that allows them to predict cash flow pressures and intervene in a timely manner. They will also want to maintain strict discipline on working capital, particularly around collecting receivables and managing inventory build-up. Furthermore it is important to be more creative and proactively intervene to lighten the working capital cycle. The Companies should maintain regular contact to identify any potential risks throughout the crisis.

The Companies should monitor the direct cost escalations and their impact on overall margins, intervening and renegotiating where they feel necessary. The Companies that are slow to react or unable to renegotiate new terms and conditions may be vulnerable to financial stress that could carry long-term implications. Business leaders should assess financial and operational risks with quickly respond attitude approach. One should be aware of the covenant breaches with banking facilities and other financial institutions relating to impairment risks in asset values which may impact the health of the company overall balance sheet.

It is crucial that where price changes are deemed to be appropriate, communicate the changes clearly with employees on the front line to ensure that they can explain the reason for the changes to their respective Clients effectively. Wherever it is possible to leverage an existing offering to develop alternative solutions to meet the evolving market needs.

Cash Optimization – Cash is the lifeline and bread butter of any business. In a volatile slowing economy and getting an immediate handle on your daily cash needs is essential. The Companies has to brain drain scenario analyses on financial, cash forecast and understand how that interacts with short-term liquidity needs. This exercise may also highlight any borrowing base or covenant beaches that could be facing and can help shape any short-term management decisions. They have to look for opportunities to build a war chest of cash and investigate whether drawing down on credit facilities could be prudent for safeguarding business. The Companies have to strategically manage working capital, potentially selling inventory or minimizing new inventory purchases to generate cash. Take a critical look at working capital KPIs such as day’s payable outstanding and understand impact of stretching these days in either direction. If possible assess capital expenditure requirements and defer non-essential spending in this circumstance.

Clients Behaviour – The Companies should maintain an up-to-date single view of the truth of contribution margin split by services to their Clients. It is advisable to utilise this to monitor changes and undertake proactive actions to prevent losses. It is also critical to monitor the changes in Clients willingness versus their ability to pay across different segments and adjust prices accordingly. Business leaders should establish a dedicated team to focus on the cost-to-serve assessment and as well as to risk manage any shortages. For financial products, Companies should use data analytics to identify high-risk Clients and work with them to mitigate the risk of default. Whenever required, review prices and re-negotiate contracts with key B2B Clients. The execution should be with a clear understanding of the level of contribution margin that will be achieved, by services and at Clients level. This will help maximise the chance of collective business continuity.

Agile Forecasting–The timely and accurate forecasting relies on scenario analysis. Any scenario analysis should test the organisation’s exposure to key risk factors and its ability to deal with different distressed situations successfully. The Business leaders can then actively prepare for these scenarios by eliminating, reducing or mitigating the risk of impairments.

Regular Communication–The Companies existing Clients will likely know you and your business best. It is preferable to communicate with them early and often, explaining any critical situations that may arise and the solutions propose to address them with positive results. The process of transparency and open communication will serve both well with confidence. Your existing Clients could be fastest source of additional liquidity.It is suggested to evaluate potential covenant breaches based on the outcome of various scenario analyses impacting financial forecast. Stay current on debt if possible and assess capital structure concerns, including whether considering refinancing or recapitalization alternatives. The engaging in key stakeholder and lender discussions early can provide the time and liquidity to address immediate potential financial challenges.

This will help to maintain Clients confidence as well as harmony within the organisation.

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

For more information, log onto  http://www.capasricha.com/

 

CA Maneet Pal Singh

Partner at I.P. Pasricha & Co. Chartered Accountants

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