Cash is King – Covid-19 times!

February 9, 2022

Just out of nowhere, the Covid-19 contagion has taken the world by storm.  This new virus, first detected in China around December 2019 end has by this April infected people across 210 countries globally by now with over 2.5 Million cases reported and taking lives of as many as 117 thousand people.  As a result, impact on communities, ecosystems and supply chains have been far reaching.  Particularly, the supply chains across raw materials to finished products and services will have economic financial ramifications on a large scale which are still being ascertained and could be unprecedented.
One of the crucial implications that businesses will ultimately face as a result of all supply chain disruptions are their Cash Flows and this shouldn’t be undermined by anyone. In this article, we shall try to suggest strategies that organizations could use to mitigate losses in business during this turbulent scenario.
To start, a business should put in place immediately a plan for its cash management as a part of its overall risk management plan.  In doing so, one needs to consider impacts on the ecosystem and supply chain pertaining to the business as change in cash management will not affect you but your customers or suppliers as well.  Schooling from the times of SARS, the 2008 recession, the ensuing practices could be considered:
1.     Assure a master plan for supply chain risk:
Examples, know your Customer situation amidst this crisis, are they in trouble or unable to pay for the goods or services that you deliver. If you make a product and export it, assure you have necessary and reliable letters of credit backing your payment.  It is critical to understand the financial risks associated with your trading partners, customers, suppliers in these times.
2.     Evaluate your Financing/Credit options:
It won’t be wise to be complacent about your credit lines and financing means available.  This situation would have changed things and you need to make sure that they continue.  Assess your scenarios and evaluate how much cash you will be in need of and for how long.  Explore alternate options sooner if required such as discounting receivables through other channels like your customers who could pay quickly or with a trading partner who can help you optimize your cash flows.
3.     Focus on Working Capital conversion:
Supply chain working capital is primary formed of three elements – payables, receivables and inventory.  A smart business would focus on balancing these three in a coordinated manner so the working capital needs are minimized during such times.
4.     Think like a CFO/Controller:
An owner now also needs to think like his finance guy works across his company, since in such times, cash is the blood line of your business and you need to operate by your financial constraints.  Your inventory levels and other parameters can simply not be just driven by customer service requirements and operational capacities.  It has to be balanced.
5.     Review your Operational costs:
Reducing your variable costs is often a quicker way to immediately reduce your cash outflows than focusing on your fixed costs. Of course, there are the typical variable cost-reduction levers, such as imposing travel bans and non-essential meeting restrictions (which might already be in place as a way to manage employee safety), imposing hiring freezes, and placing restrictions on discretionary spend like entertainment and training.  When labour is a significant cost line in your business, consider avenues that might help reduce spend to avoid getting to a situation where layoffs are required.  For example, look for opportunities to reduce contract labour and re-distribute work to your permanent workforce. Encourage employees to take available leave balances to reduce liabilities on the balance sheet. And, if necessary, consider offering voluntary, or even involuntary, leave without pay to preserve cash.
6.     Reassess Capital investments:
With cash flow forecasts in mind, consider what’s really necessary for the near term. What capital investments can be postponed until the situation improves? What capital investments should be reconsidered? What capital investments are required to position for the rebound and for creating competitive advantage?
7.     Detailed Inventory requirement assessment
Companies are at risk of experiencing supply chain disruptions due to shortages in raw material and component parts. Inventory safety stock parameters will most likely need to be updated to reflect the increased demand and supply-side volatility, which will have the effect of increasing overall inventory levels, assuming that’s possible. At the same time, businesses will be thinking about securing additional inventory, or strategic stock, as a further buffer against the potential impact of a prolonged or much broader supply chain disruption. Also at the same time, from a cash flow perspective, companies may be considering actions to reduce finished goods inventories, especially in perishable products, where waste is an important consideration and markets remain difficult to access.  Balancing the demands for more buffer inventory and managing cash flow may not be as easy as it sounds. Companies that still use simplistic approaches to inventory management might be able to do a quick assessment and find some immediate opportunities to drive down inventory. However, many companies are likely to find that significant inventory cuts have an adverse effect on customer service and production. Sustainable savings will most likely require fundamental improvements in end-to-end supply chain inventory visibility, demand planning, inventory and safety stock policies, production planning and scheduling, lead-time compression, network-wide available-to-promise, and SKU (stock keeping unit) rationalization.
8.     Delay payables, carefully:
One way to sustain your cash flows is to extend paying your creditors.  But remember one has to tackle this very carefully in order to save the relationships from damaging.  Businesses might be forced, inadvertently, to delay payments if they are stuck on inventory not realizing, which in turn might affect the suppliers in managing their operations and cause later delivery and quality achievements for them.  So it is important to smartly chalk a working agreement with your suppliers that both parties can live with.  Situations where you might need to quicken your payments to a certain supplier might also be necessary who could be on the edge of failure and you need to support him to maintain the integrity of your supply chain.
9.     Expedite receivables:
Unlike the boom when a business is complacent about its receivables and less concerned about its cash flows, these times warrant revisiting your receivables.  Just like you might delay your payables, a customer might delay your receivables too, so it is vital to improve the rigour of your collection process.  It will be wise to focus on specific customers to identify who is changing their payment practices.  Also, one should make sure the business raises its invoices timely and accurately not leaving any reasons for a delay in realizing its receivables.
10.  Audit Receivables & Payables:
Make sure you’re paying the right amount for the goods and services you procure and collecting the right amount for goods and services you sell.  Assure you are not over paying the payables or don’t miss out on any available discounts.  For receivables, assure there is regular payment follow ups.  Also, for avoiding lapses in future due to such situations, set up a long term policy for process improvements of your payables and receivables.
11.  Check for Business interruption insurance:A business having an existing business insurance policy and coverage it has for any significant business disruption, should check its availability.  A loss coverage due business disruption as a result of such an epidemic may not be covered in policies, especially since SARS, some insurers have excluded claim eligibility as a result of such losses.
12.  Consider alternate/non-traditional revenue streams:
If your scenario planning is showing pressure on your continued revenue streams, consider ways you could temporarily or maybe even permanently replace that revenue. For example, if your primary markets are international, how might you pivot to domestic markets (especially if your inventory is perishable)? If you have assets you use to generate revenue, how could you think differently about how those assets are used to generate alternate revenue sources? Not only could this reduce some of your top line pressures, it could also mean not having to reduce your cost lines as significantly (not to mention a potentially more diversified revenue mix in the longer term).
13.  Convert your Fixed costs into Variable:
In times of uncertainty, it’s generally a good idea to swap fixed costs for variable costs wherever you can–preserving your core business while increasing your flexibility on the fringes. Selling assets and then leasing them back is one way to raise emergency cash. You might also want to consider expanding your use of practices such as contract manufacturing, transportation fleet leasing, and third party warehousing. This is not likely a quick-hit measure for most companies, but may be important to longer-term cash flow management, depending on how long demand and supply chains are disrupted by COVID-19.
14.  Think beyond:
To maximize working capital, you can’t only focus on your own operations and inventory levels: you need to think about your entire ecosystem and supply chain. Squeezing inventory out of your operation may not do much good– and could in fact introduce significant risk–if it just shifts the burden to a supplier or customer. The same is true for payables and receivables. It’s important to carefully consider the upstream and downstream impact of your actions. High-level financial risk assessments should be conducted on any critical, sole-source suppliers to identify issues before they become problems. In extreme cases, if a critical supplier is at risk, you might even need to buy a stake in the company or acquire the business outright to protect your supply chain and keep your goods and services flowing.

Cash flow management needs to be an integral element of a company’s overall COVID-19 risk assessment and action planning in the near term. Even for companies that have not yet been adversely affected, we recommend management teams with concerns about COVID-19 actively evaluate their cash flow requirements, develop appropriate actions under various scenarios, and assess potential risks in and to their customer base and supplier network.
It is imperative that you reach out to your Accountant and seek his services for a cash flow analysis of your business and place before yourself a projected cash flow for the upcoming three months as well to serve as a guide in the near term.  To be abreast with business situation, you need to assure your books are always updated and monthly financial reporting is available to work out the cash flows.
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