Covid–19: The return of “Cash is King”

As the unprecedented spread of the coronavirus around the world continues, businesses are preparing for disruption to their workforce, supply chains and projected cash flow.

There has correctly been a lot of focus on business continuity planning to keep businesses operational through the crisis. As the international scale of the pandemic progresses through the complex ecosystem of the global economy, business leaders need to work through their own risks and interdependencies to proactively balance shielding with readiness. 

FINANCE AND CASH

Cash and headroom are critical as operations and output are impacted while staff and establishment outgoings remain fixed. Businesses should review all assumptions that feed into their cash flow projections, and run scenarios on profit and loss, balance sheet and cash flows with various degrees of interruption of how their businesses may be impacted. This includes assumptions around reduced capacity, proportions of the business being inaccessible or shut down, or assumptions that can be flexed around the length of time the disruption lasts. It is important that this is kept up to date as information evolves, and triggers are identified to manage liquidity risk. Depending on reserve levels and how exposed your business sector may be, companies need to discuss expanding debt facilities with their lenders, postpone large financial outgoings, anticipate covenant problems, and discuss arrangements with suppliers and landlords to extend credit.

SUPPLY CHAIN

Businesses need to review upstream and downstream to identify where the vulnerabilities are. The impact on supply chains was highlighted from the shut-down in China, but as that disruption expands across the world, some of it’s impact on businesses is yet to be felt depending on lead times and component stocks. Business should factor in contingencies around their specific supply chain as port and container backlogs are slowly cleared, particularly on seasonal stock.

FORECASTING DEMAND

In Europe, seasonal businesses will be significantly impacted if disruption coincides with demand, and leaving inefficiencies such as over-capacity or excess stock. Businesses should review their inputs to avoid having fixed commitments and outgoings should turnover be significantly reduced. Mitigating actions that could be pursued include taking more flexible arrangements on purchases should they need to be reduced or returned and considering government supports available for reduction in staff hours, salaries or headcount.

Businesses must expect that their customers will be looking for this same flexibility of arrangements as they in turn look to mitigate their exposure. Businesses that deal in B2C markets should expect that as consumer sentiment drops, their customers may wish to postpone large financial commitments and purchases, and will be reluctant to commit to events that they are unsure will go ahead. As consumers behave differently during a disruptive period, such as avoiding gatherings or working from home, this should be factored into projected demand.

Those serving B2B markets need to also look through their customer to the ultimate end users to really understand how their customers are exposed and may need support, and work through how this will impact your business in terms of sales pipeline, stock and receiving payment, whilst maintaining existing customer relationships.  

SERVICE DELIVERY MODELS

Critical activities, key customers and core people will be identified through organisational business impact assessment. Alternative service delivery options should be explored, for example home delivery or in-home services, and how this could be serviced by redeployment of current staff. Management will need to ensure that they understand the terms and conditions of employee contracts and agree how they wish to engage with their workforce should this arise. Businesses may need to contract and engage additional or alternative staff or suppliers in the event that their regular workforce is unavailable.

Some sectors have already felt the impact of both the spread of the virus and the actions taken to slow its spread, such as travel and tourism, retail and hospitality. While certain corporates may feel further insulated from the contagion, t is vital that senior leaders understand the impact these business risks have on the cashflow, and scenario plan to put mitigating action plans in place to protect their businesses.

If you would like more information, please contact us to discuss.

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Mazars Covid-19 POB Approach

Mazars Covid-19 POB Approach