CASH PRESERVATION AND CASH FLOW MANAGEMENT

HOW TO THRIVE IN POST- COVID ERA
Financial management in the small firm is characterized, in many different cases, by the need
to confront a somewhat different set of problems and opportunities than those confronted by
a large corporation.
One immediate and obvious difference is that a majority of smaller firms do not normally have
the opportunity to publicly sell issues of stocks or bond s in order to raise funds. The ownermanager of a smaller firm must rely primarily on trade credit, bank financing, lease financing,
and personal equity to finance the business. One, therefore, faces a much more severely
restricted set of financing alternatives than those faced by the financial vice president or
treasurer of a large corporation.
On the other hand, many financial problems facing the small firm are very similar to those of
larger corporations. For example, the analysis required for a long-term investment decision
such as the purchase of heavy machinery or the evaluation of lease-buy alternatives is
essentially the same regardless of the size of the firm.
As a typical “black swan” event, COVID-19 took the world by complete surprise. As we enter
April 2020, the virus has infected over 1,391,890 people, and led to more than 82,000 deaths.
More importantly, more than 75 countries are now reporting positive cases of COVID-19 as the
virus spreads globally, impacting communities, ecosystems, and supply chains far beyond
China.
The focus of most businesses is now on protecting employees, understanding the risks to their
business, and managing the supply chain disruptions caused by the efforts to contain the spread
of COVID-19. The full impact of this epidemic on businesses and supply chains is still unknown.
However, one thing is certain: this event will have global economic and financial ramifications
that will be felt throughout global supply chains, from raw materials to finished products. There
are key steps you can take now to help ensure your organization is prepared to manage the
escalation of challenges associated with COVID-19, as well as prepare for the potential
economic aftermath ahead.

  1. Ensure you have a robust framework for managing supply chain risk.
    • Supply chain management is a complex challenge, and finance-related problems
    only add to the risk.
    • Do you know if any of your customers are in trouble and might be unable to pay for
    the goods and services you deliver?


• Ensuring you understand the financial risks of your key trading partners, customers,
and suppliers is a critical consideration in times like these.

  1. Ensure your own financing remains viable.
    • In these circumstances, don’t assume the financing options you previously had
    available to you will continue to be available.
    • Undertake scenario planning to better understand how much cash you’ll need and
    for how long.
    • Use this opportunity to actively engage with your financing partners to ensure your
    available lines of credit remain available, and to explore new or additional options
    should you require them.
  2. Focus on the cash-to-cash conversion cycle.
    • Under normal business conditions, companies primarily focus on the profit and
    losses–growing the top line while managing the bottom line.
    • Routine back-office activities such as paying bills and turning receivables into cash
    are often taken for granted.
    • In the current abnormal business conditions, smart companies are shifting their
    focus from the income statement to the balance sheet.
    • Of the three elements of supply chain working capital–payables, receivables, and
    inventory–, supply chain executives have a tendency to focus on inventory.
    • But, in order to minimize working capital requirements during challenging times, it’s
    important to apply a coordinated approach that addresses all three areas.
    • As supply chain managers step up to the challenges of disruption and inventory
    shortages, they generally spend their days thinking about operations and don’t pay
    much attention to finance and treasury issues.
    • Often, inventory levels and other critical business parameters are driven by
    customer service requirements and operational capabilities, not financial
    constraints.
    • But what if the situation was reversed?
    • What if working capital was the company’s primary constraint on inventory, and
    supply chain managers were given the challenge of making it work? How would that
    affect your supply chain and inventory practices?
  3. Revisit your variable 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.
• None of us wants to get into such a situation as it will not only adversely impact our
image but also when operations ramp up we will not have enough hands-on-deck
to take over the operations. A smart approach needs to be adopted now.
• One of my clients has asked their senior leadership team to voluntary accept a part
of their current remuneration as deferred salary. This has resulted in a 30% drop in
the salary outflow for their top 20% of the team (and these are highly paid
professionals).

  1. Think beyond your four walls.
    • 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, solesource 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.
    Guru – Mantra for recovering and returning to normal business operations
    SALES IS VANITY
    PROFIT IS SANITY
    CASH IS THE ONLY REALITY