COVID-19 is generating unprecedented levels of challenges in company ecosystems — including supply chains, customer demand, strategic planning and operations, and liquidity — alongside high levels of uncertainty and volatility. Given this, it has become more essential than ever for companies to focus on short-term financial management as part of their overall business continuity plans.
This article discusses methods of short-term financial management, specifically (1) generating cash and protecting liquidity; (2) preserving working capital; and (3) creditor and debt management.
GENERATING CASH AND PROTECTING LIQUIDITY
To generate cash and protect liquidity, companies can look into cash reserves in subsidiaries and business units, as well as ways to repatriate said cash to areas of the business where it is most needed. Untapped loan facilities and other lines of credit are also options, but these require communication with lenders to confirm availability given these challenging times.
Liquidating short-term securities and other non-essential assets can also be a source of cash. However, care must be taken as to which assets to sell, given the current all-time low in asset valuations. Government stimulus funds and moratoriums on payment of certain bills can also help companies stay afloat. Similarly, insurance claims specifically for business interruptions should be explored. However, given insurers’ recent experience with SARS and MERS, it should be noted that some insurance contracts may include specific exclusions on pandemics or epidemics.
Even so, the cash generation exercise should not be short-lived, given the continuing uncertainty of the COVID-19 situation. Companies need to identify and sequence longer-term cash sources and maintain discipline to perform daily cash tracking, cash flow planning, and determining liquidity strategies. These longer-term cash sources can involve identifying alternative revenue sources for the company and looking at areas within the business where costs can be further optimized.
PRESERVING WORKING CAPITAL
Another area that needs to be managed is how to preserve the company’s working capital reserves. This requires looking into the three aspects of working capital: suppliers (payables), customers (receivables), and inventories.
Delaying payments to suppliers is one possible way to manage working capital. However, care must be taken to distinguish which suppliers are considered essential and non-essential for business continuity. In the case of essential suppliers, open, clear, and transparent communication is key. Companies cannot unilaterally decide to delay all outstanding payments when such payments may make or break key supplier relationships in these challenging times and further worsen the state of an already troubled supply chain. For businesses that have healthy financials, the situation may present a potential opportunity to re-negotiate more favorable payment terms.
Our present situation requires company customer relationship management teams to be more proactive with customers. One approach is for companies to offer discounts on receivables to accelerate payment. As with suppliers, this situation presents an opportunity to re-negotiate pricing and payment terms for existing contracts with customers while taking into consideration their respective financial health. It is crucial to establish better levels of communication with existing customers to establish stronger relationships and generate longer term value that benefits both parties.
In the case of inventory, the general tendency is for companies to liquidate excess inventory to generate as much cash as possible. However, care should be taken given the uncertainty of the pandemic in terms of reliability of the supply chain. There may actually be a need to increase the amount of inventory at hand to decrease the risk of shortages and further damaging customer relationships. Companies will need to reassess their traditional assumptions on economic order quantity and optimal inventory levels, among others.
CREDITOR AND DEBT MANAGEMENT
In the wake of disruption brought about by COVID-19, company short and long-term cash flow forecasts will need to be taken into account and reassessed to determine the likelihood of breaching any debt covenants, as well as the potential inability to service debts as they come due.
Scenario planning and analysis should be considered when forecasting said cash flows, while aggressive, base, and conservative (ABC) assumptions must be developed to take into account indeterminate factors. As an example, “aggressive” can assume fast recovery post-COVID (V-shaped), “base” can assume slower recovery post-COVID (U-shaped), and “conservative” can assume a prolonged impact of COVID (L-shaped). It will be best for companies to be proactive when it comes to discussions with lenders, who will especially appreciate transparency as key stakeholders in the business. Practicing transparency may even open doors to negotiating for better terms or even additional facilities. This is, of course, provided that the negotiating company can clearly prove that they have robust financial management plans in place, and have substantial, well-thought out assessments of how COVID-19 has impacted them.
STAYING ONE STEP AHEAD
COVID-19 continues to present unique challenges for companies today, dampening demand while simultaneously disrupting supply. Staying one step ahead and being proactive in short-term financial management as well as long-term value creation will allow companies to emerge stronger and wiser after this global crisis comes to pass.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.
Smith Lim is a Senior Director from the Transaction Advisory Services of SGV & Co.
