Cash is King – Covid-19 times!!!
Cash is King –
Covid-19 times!!!
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.
Feel
free to write to us for any queries on info@gjmco.in.
Thanks & Best
regards,
Knowledge Base team
GJM
& Co.
Chartered
Accountants
Outsource to
Outperform
Accounting |
Bookkeeping | Payroll | Taxation | Business Setup
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