Focus on cash flow and liquidity for COVID-19 resilience

Article provided by: Grant Thornton | View original article

With recession looming, 4 ways to act now

The COVID-19 pandemic is roiling financial markets, threatening businesses and challenging management teams. In these uncertain times and with a possible recession looming, the cash and liquidity needs of a business are paramount. Focus on these four areas now to position your business for what’s coming next.

1. Cash is king

Understand your cash and working capital needs. Cash is the lifeblood of any business. In a volatile and slowing economy, getting an immediate handle on your daily cash needs is essential. Take a critical view of operations, review existing cash flow forecasting processes and understand how potential disruptions to operations may affect liquidity.

  • Run scenario analyses on your financial and cash forecast and understand how that interacts with short-term liquidity needs. This exercise may also highlight any borrowing base or covenant beaches that you could be facing and can help shape any short-term management decisions.
  • Look for opportunities to build a war chest of cash and investigate whether drawing down on credit facilities could be prudent for safeguarding your business.
  • Strategically manage working capital, potentially selling inventory or minimizing new inventory purchases to generate cash. Take a critical look at working capital KPIs such as days payable outstanding and days sales outstanding and understand impact of stretching these days in either direction. Assess capital expenditure requirements and defer non-essential spending if possible.

2. Cost optimization

Be relentless on cost control. Maintaining your current or historical levels of profitability in an environment where supply and demand fundamentals are decreasing simultaneously can be difficult without closely analyzing spending.

  • Develop a strategy: do not execute cost-cutting initiatives at the risk of compromising revenue generating capabilities or diminishing value.
  • Review fixed and variable costs carefully and determine what costs you actually need to run the business.
  • Develop and monitor cost reduction initiatives, such as rationalizing SG&A, taking a close look at headcount and instituting policies that encourage and reward cost savings and conservation.

3. Evaluate customers and suppliers

In times of economic uncertainty, businesses could see increased pressure on the purchasing power and credit-worthiness of customers while also facing tighter credit terms and product availability from suppliers.

  • Do not assume your customers are financially healthy. Re-evaluate credit terms with current customers, negotiate the shortest reasonable terms, and carefully review the credit-worthiness of each new customer before extending credit.
  • Continuously monitor accounts. Failing to collect receivables timely (or even on an accelerated basis) may result in a cash flow shortfall that could have an immediate impact on all areas of your business.
  • Negotiate for the most favorable credit terms with suppliers and critically evaluate your supplier base to determine if your current agreement is still the most favorable for your business.

4. Communicate early and often with your lenders

Your existing lenders will likely know you and your business best. Communicate with them early and often, explaining any situations that may arise and the actions you propose to address them. Transparency and open communication will serve you both well. Your existing lender could be your fastest source of additional liquidity.

  • Evaluate potential covenant breaches based on the outcome of various scenario analyses impacting your financial forecast.
  • Conduct detailed modeling of your working capital facilities, particularly with asset-based loans, which can change their availability formulas due to updated net orderly liquidation values via new appraisals.
  • Stay current on your debt if possible and assess capital structure concerns, including whether you should consider refinancing or recapitalization alternatives.
  • Engaging in key stakeholder and lender discussions early can provide you the time and liquidity to address your immediate potential financial challenges.

The COVID-19 pandemic presents novel challenges and a chaotic business environment. By focusing now on cash flow and liquidity, you can provide your business with the financial cushion and flexibility to weather the storm.

For more – economic analysis, business implications, and new thinking on how to respond, restore, and plan – please visit Grant Thornton’s COVID-19 resource center.

Ryan Maupin
Strategic Solutions
T +1 212 542 9988

Bill Fasel
Managing Director
Strategic Solutions
T +1 312 602 8834

Paul Melville
Strategic Solutions
T +1 312 602 8360