COVID-19 | A GLOBAL CRISIS
CASH, CASHFLOW, & CREDIT MANAGEMENT IN A CRISIS ENVIRONMENT.
Whilst COVID-19 will continue casting a dark shadow for some time to come, business resilience is crucial in other to steer beyond the crisis successfully.
Resilience is key. The term resilience became a buzzword in recent years. Digital technologies enable new business models that are disrupting many sectors. Established businesses need to build resilience to be prepared for the unexpected. In practical terms, a resilient business is one that is viable, alert, prepared, sharp and swift.
At Pentagon Finance, our working capital practice are continuously working to support our clients navigate through the current coronavirus (COVID-19) crisis to ensure they have effective responses to the ongoing impact of the COVID-19 global lockdown on their cashflow, finances, and key business activities.
Our Credit Management team forms part of our wider Working Capital Group, the credit management team leader Noureen Matongo has put together practical insights and a brief guide to help organizations focus their cash and credit management strategy over the coming weeks and months.
Situation Analysis
In light of the current crisis, one quarter of companies in the UK have temporarily closed because of the coronavirus lockdown and the majority of those still operating have reported lower turnover, according to the UK Office for National Statistics — “ONS”. A recent ONS poll of 5,300 businesses — the largest so far of the impact on businesses — covered the first two weeks after the lockdown on March 23. During that period, 0.4 per cent of businesses said they had ceased trading. The direct implications to revenue and cashflow is profound across sectors and businesses of all shapes and sizes, as Noureen describes it, this is one of the biggest challenges of our time that is bound to create a major paradigm shift in the way most businesses prioritize and manage cash going forward.
Key Challenges facing Businesses
Some of the key challenges facing businesses in the current COVID-19 crisis and lockdown environment is unprecedented and not limited to the following issues:
- – A desperate dash to manage cash and cashflow where and when there has been a drastic reduction in sales. In light of the sudden reduction in revenue, businesses still have to manage and pay for fixed recurring costs associated with rent, insurance, staffing/employee pay and commissions, stock or product manufacturing and local/international product shipping.
- – Frantic adjustments aimed at trying to cope with disrupted supply chains and distribution challenges would require businesses to spend more time examining the suppliers they work with to quickly identify where their main vulnerabilities and opportunities might be in the middle of the crisis.
- – Rapidly trying to understand their duties are as employers to their staff, such as supporting employees with their well-being, better controlling the distribution of Personal Protective Equipment (PPE) for their employees and supporting employees work from home.
All of these issues and factors have a direct impact on cash and cashflow for most businesses and the need to prioritize cash and improve credit management policies and procedures is at the forefront of business priority in the current COVID-19 crisis environment.
Historical Lessons from 2008:
Prioritizing Cashflow and Credit Management
There were a number of actions that businesses failed to take prior to and after the last global crisis of 2008. In particular, many businesses failed to proactively review their existing and potential customer bases to identify customers/clients who carry varying degrees of risk of default in the event of a crisis or major economic downturn in any given sector.
The aged debtors listing of most businesses look different today compared to the first two months of 2020, the shift in value and ageing highlights the strain to cash and revenues, the shift also magnifies the importance of having effective contingent strategies to manage cash in a period of crisis, for example ensure to constantly risk assess and understand your customer base which is essential in identifying those customers at risk of defaulting as a result of a crisis, such as COVID-19.
Below are a few other lessons from the 2008 financial crisis that are essential to help businesses deal with this crisis and other future crisis to come:
- Profile the behavior of your B2B and B2C customers in a pre-crisis environment with a view to understanding and/or predicting your most likely scenario/ exposure to cashflow risks in a crisis environment.
- Gather and conduct post crisis data analysis to help understand how your current customers and supplier performed and managed their way through this crisis and previous crisis if applicable.
- Review the profile of executives and directors who are running businesses that are key to your revenue and customer base, and also review the profile of those executives running supplier businesses that are key to your supplier chain, this is essential to track and trace any historical behaviors that can present a major risk to your cashflow in a future crisis environment.
- Review your customer and supplier chain contracts to ensure that you can manage and cope with risks of overstocking or running out of goods and services to sell to your customers.
- Review your spending policy to ensure your expenditures are focused on business critical activities and reduce cash outflow to non-business critical activities.
Planning through the Uncertainty
For most businesses it is important to develop an effective plan that is aimed at segmenting and classifying your customer and supplier base between those who are defaulting in the very short-term as a result of the crisis and those who were previously at risk of defaulting regardless of the crisis.
The probability of recovering the cash tied up with customers who are experiencing short term issues as a result of the crisis are greater when compared to those who have been at risk of default even before the crisis, the risk of insolvency for the latter is higher in most cases.
The probability of running out of stock of goods sourced from non-contracted suppliers is greater than those where you have firm contracts in place with SLA’s with your suppliers. The room to negotiate discounts and reduction to supplies in other avoid overstocking is also greater when you have a contract commitment with a supplier than when there is none.
Each of the above risks and criteriums of uncertainty has a direct impact and implication on your organization’s cash, cashflow, and credit management strategy.
Think beyond your four walls. To maximize working capital in the current COVID-19 environment, 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.
A useful quote by Mary Anne Radmacher reads, “Courage doesn’t always roar. Sometimes courage is the quiet voice at the end of the day saying, “I will try again tomorrow”.”
At Pentagon Finance, we focus on helping our clients and organizations successfully manage through a myriad of issues during the COVID-19 crisis, gathering useful data for machine learning, review and understand defaulting circumstances specific to the crisis and providing risk analytics into all data gathered across industry throughout the crisis period.
For more information on how Pentagon Finance can help your business navigate through the challenges of the current pandemic contact us.
Http://www.pentagonfinance.com
Tel: +44 7951 304 294
