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Crisis management

Managing your company liquidity and cash flow during a crisis

Author: Mikk Mägi

The COVID-19 pandemic is placing companies and their management teams in a challenging situation due to the lockdowns and state of emergency (defined in national law of Estonia as “emergency situation”) established around the world. One of the most critical areas is managing the companies’ cash flows and decisions to maintain liquidity.

The extent what the impact of the pandemic will have on the world’s economy is currently unknown, and thus ensuring liquidity is not just a concern for the most heavily impacted sectors but for all companies. To get through these volatile times, I would highlight some key areas that companies should focus on first and foremost.

Determine your cash and working capital needs

It is not profit but the cash flow that shows the vitality of companies. It is paramount to understand the company’s daily cash needs to ensure sustainability in a volatile environment. To do this, it is necessary to review the current processes for forecasting cash flow and to analyse how different factors (such as delays in receipts) impact your company’s liquidity.

  • Prepare scenarios for financial and cash flow forecasts, to understand how different changes impact the company’s short-term liquidity (i.e. how much cash is necessary for continuing activities and how long the existing cash will last). Running different scenarios will provide important information for making short-term management decisions. It enables one to identify situations where you may have problems with fulfilling contracts, you may need to proactively communicate with lenders to obtain a grace period or look into alternatives for refinancing the business etc. Communication with lenders must be open and regular to inform them early in any changes in the situation. Make sure that the financing of your company is secured. Existing lenders may be your fastest source of additional liquidity (e.g. factoring of invoices).

  • Focus on the balance sheet and management of working capital. Critically review working capital KPI’s (inventory turnover ratio, receivables and payables turnover ratios) and assess how liquidity is impacted by delays in receipts, deferral of payments and optimizing stock. This information allows the management to make decisions to increase liquidity (e.g. reducing volume of goods in stock).
    In a nationwide state of emergency, it is reasonable to make use of all possibilities to improve short-term liquidity. For example, it is reasonable to contact the Tax and Customs Board early to pay tax liabilities in instalments. In addition to payment in instalments they have also announced that interest will not be charged on tax liabilities from 1st of March to 1st of May. It is also worth considering contacting SA KredEx to help with liquidity issues, as they will start issuing operating credit based on the relief measures adopted by the Estonian government.

  • Take a critical look at your investment plans and evaluate whether they will contribute to the growth of the company’s turnover and profitability (e.g. by automation of processes) or give an advantage when overcoming the state of emergency (including possibilities related to mergers and acquisitions). Here, too, it is worth considering turning to KredEx, which based on the relief measures adopted by the government will start issuing investment loans to make better use of business opportunities. If possible, postpone investments in the short term in order to maintain liquidity.

  • If your company was well-functioning, profitable and liquid before the pandemic, but due to a steep drop in revenue has become temporarily insolvent, you should think about reorganization of your company. If your company has become insolvent but you expect that it can once again become a functioning business after the situation normalises, then reorganization can spare you from temporary insolvency and avoid bankruptcy.

Evaluate the situation of your customers, suppliers and cooperation partners

Existing customers, suppliers and cooperation partners may also start to pressure companies during periods of instability where demand decreases and supply chains are under pressure. Customers want to increase lines of credit and extend payment terms in order to improve their liquidity, but suppliers might do the opposite – set tighter terms.

  • The companies’ credit monitoring procedures are put to the test in an emergency situation and it can be challenging as they tend to take a more easy-going attitude to such procedures during periods of growth. In a crisis, though, it is irresponsible to expect that your customers’ financial health is as good as it was previously. So take a look at the current terms for credit, negotiate for more favourable credit terms and carefully check each new and existing customer’s creditworthiness before increasing lines of credit.

  • Continuously monitor whether customers are keeping current with paying invoices. Delays in receipts can lead to a shortfall in cash and this can affect your business activities. Don’t be surprised if existing customers delay paying invoices to maintain their own liquidity. Companies must have processes in place that help to respond timely and systematically. Instruct the employees involved in the process (including accountants, credit controllers, client account managers etc.) so that they know how to react in the current situation.

  • Negotiate with suppliers to agree on better credit terms for your company; even if only temporary terms. It is also possible to delay outgoing payments to improve the company’s liquidity, but this is a slippery slope that could have a disastrous effect on the entire supply chain. Instead, try to reach an agreement with suppliers that is satisfactory to both sides. Make also maximum use of discounts related to expedited payments.

Optimization of expenses

Demand drops in a crisis, which puts supply chains under pressure and cuts into profitability. To maintain profitability and stabilize the situation for the short term, review the company’s fixed and variable costs. Management decisions need to be strategic, so that the cost-cutting do not compromise activities that support turnover growth and do not have a negative impact on the company’s value offer.

  • Companies with high labour costs should try to overcome the emergency situation without layoffs. Our advisors provide a detailed overview how to cope with the situation in the article “What can employers do to minimize the losses from coronavirus?“ The Estonian government has approved a temporary subsidy program that will help employers pay at least 70% of the average monthly wage of the employee (capped at 1,000 euros) for up to two months. Companies that meet the criteria should seize this opportunity to improve their short-term liquidity.

  • Review both fixed and variable costs critically to be sure that the expenses are absolutely essential to continue day-to-day business activities. Due to the restrictions established in the state of emergency, certain expenses will decrease automatically (such as travel and accommodation for business trips). It is reasonable to limit training expenses and maybe review the procedures for payment of performance bonuses in the short term. Evaluate the contracts that are in force and assess whether they are beneficial and necessary in the current situation. For example, the frequency and price of cleaning services, care of office plants, quantities of regular orders for office supplies and so on.

  • In the short-term, sale-leaseback transactions could be considered as measures for improving liquidity, but before making this decision, consider the current contracts in force and being in compliance with them (this could have a significant effect on the company’s EBITDA, related multiples and covenants).

The state of emergency due to the COVID-19 pandemic is a significant challenge for enterprises and the business environment in general. All companies need to focus on maintaining their liquidity and need to be flexible to survive in the uncertain and unpredictable conditions. The companies’ liquidity will be under pressure in the short term, but in the medium to long term, the current situation will create favourable opportunities for new businesses, services and sectors. It will also force companies to adapt to the new situation and review their current business models, which in turn could become a factor in success in the long term.

Nothing in this alert should be construed as expert advice. This alert is a generalized summary. Professional counselling should therefore be sought before any action is undertaken.

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