Cash Flow Discipline for Surviving COVID-19

The latest forecast from McKinsey and Company shows most global economies not returning to pre-crisis levels until Q4 and anticipates recessionary conditions, with US GDP shrinking between -2.4% and -8.4%; the Eurozone down by -4.4% to -9.7% and the World economy declining -1.5% to -4.7% during 2020.

The global nature of trade means that there will be an immediate knock-on effect on Asian business, as illustrated by this study which found that 27% of the decline in American demand and 18% of that in the European Union was borne by foreign producers.

With no immediate end in sight as the virus continues to spread worldwide, many companies are unfortunately going to fade away due to rapidly changing market circumstances that are largely beyond their control.

However, those who take the right action now can significantly increase their chance of business survival and even emerge stronger from the crisis.

Here are some essential Cash Flow Management steps for Asian manufacturers and exporters to ensure business continuity in the face of the fast-approaching economic downturn driven by Covid-19.

Don’t Delay – Talk to Your Bank Manager

While company operations provide plenty of opportunities for cost-cutting by introducing accounting best practices, improving cooperation with suppliers and clients and considering alternatives in supply chain finance, the most important first step is to talk to your bank in order to secure the maximum available credit facility.

When customer confidence falls and business slows, cash reserves are essential to ensure company survival and bank borrowing is an important support mechanism. However, the availability of loans can be uncertain at the best of times and it is important to be aware that many larger companies with pre-arranged credit lines are already topping up their liquidity in order to maximize their chances of survival.

According to a recent report in the Financial Times ‘more than 130 companies in Europe and the Americas (including AB InBev, Delta Airlines, Expedia, Ford Motors, GM, Hilton Worldwide and Kraft Heinz) have drawn USD 124 billion from credit lines in the last 3 weeks.’

Take a lesson from these blue chips and talk to your bank now. This responsible approach is always preferable by addressing potential cashflow problems in advance before the situation takes a turn for the worse. And remember that at a certain point in any crisis banks will stop lending, so make the effort to get ahead of local companies facing similar circumstances.

Review Operational Expenses

Knowing that the market is likely to get worse over the coming months and that a fall in sales revenue is almost inevitable, a review of all costs is recommended with a view to cutting unnecessary business expenses. In particular, recurring costs represent an obvious drain on cash flow that should be analysed carefully.

Companies are advised to avoid or delay major investments and pay particular attention to the Net Present Value of any expenditure to evaluate future cash flow from new projects and the expected payback period.

Learn to calculate the net present value to determine the estimated profit a project can generate on a business’s future cash flow streams.

Remember: Cash Flow Is King

Cash flow reflects the net amount of money coming in or going out of a business and operations, investments and daily financial activities must be balanced to keep the company afloat. Cash shortages hamper operations and hinder growth, often causing owners to make short-sighted decisions that can hurt the business in the long term.

As explained in this blog post introducing the basics of cash flow management, it pays to maximize the use of software tools which give a broader, real-time assessment of a company’s financial situation. Management accounting techniques are applied and financial ratios tracked to regularly assess the liquidity position of a business.

Analysis of a company’s Cash Flow Statement often underlines an important gap between the value of product sales to customers (often shipped on generous terms of credit) and payments to suppliers (more quickly made after goods are produced).

If the credit terms provided to debtors (customers) is longer than to suppliers, businesses may have to cover the discrepancy by using their cash reserve. This can be a significant factor contributing to poor cash flow.

Negotiate Better Terms with Suppliers and Buyers

The improved visibility provided by more rigorous financial analysis informs important decision-making and partnership discussions with both Suppliers and Customers.

If the Cash Conversion Cycle indicates that suppliers are paid too soon then this leaves a gap to be financed before customers settle their invoices, then terms can be renegotiated. However, it is important to remember that the finances of smaller manufacturing suppliers tend to be less secure than larger clients in European or US markets. Hence, there may be less flexibility, especially in difficult market circumstances such as those created by Covid-19.

Customer contracts have a much more significant impact on Cash Flow than those with Suppliers and, in the face of the current market uncertainty. It is essential for businesses to learn to avoid late payments as this is a major reason why companies face cash flow issues. A sensible first step is to request shortened payment terms from all Customers as a matter of standard practice.

Maintaining close Customer relations is never more important than in times of crisis. By keeping all parties forewarned of potential difficulties, sudden surprises can be avoided and, in the case of cash flow difficulties, a full explanation can help an early resolution of the problem.