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COVID-19 and cash flow: Steps to take now

March 25, 2020 Article 7 min read
Tim Weed Sandor Jacobson
Amid COVID-19 disruption and falling demand, businesses that want to survive need to prioritize their financial strategies. See our top tips for success, and then see how you stack up.
Man looking out window in empty boardroomWe don’t have to tell you COVID-19 is creating unprecedented disruption in our daily lives — personal and professional. Businesses are already feeling the impact and, with the recent announcement of automakers and large suppliers suspending U.S. and European production, the cascade of downstream effects will no doubt quicken. The situation is changing constantly, and tactics that make sense one hour end up being scrapped the next.

The strategy that won’t change is the need to be extremely proactive around cash flow and liquidity. In a crisis, it usually isn’t losses that bankrupt companies; it’s the lack of cash and access to credit.

We’re not being alarmist when we say that the sooner you take action, the better. Responding quickly helps you get costs under control and maximize liquidity, which extends the survival timeline.

Liquidity and cash flow are critical to business resilience. Right now, every company — and we mean every company — should be evaluating near-term financing needs. This will ensure business continuity and enable your leadership team to make the tough decisions facing them in the days and weeks ahead.

Don’t put your ability to fund operations at risk. Take the following steps:

1. Get a read on demand signals to estimate required employment levels.

Look to your operational leadership to find out what kind of demand signals are coming from your customers. What’s their situation? How have they been impacted, and what impacts do they anticipate? What concrete plans have they put in place?

Based on those data, determine the employee support needed to sustain predicted business. If you’ve got clear demand for four to six weeks, for example, scale your employment level accordingly. The information you gather from your customers — and your own assessments and confidence levels of market predictions and conditions, future orders, and lead times — can all be translated into optimal staffing.

Next, model out what the demand window looks like in terms of payroll reduction, so you understand what the changes mean to liquidity. We’ve already seen companies contemplating laying off all workers. Before taking that step, determine the appropriate degree of cost-cutting required.

2. Translate demand signals to inventory needs.

Again, taking those demand signals you gathered from customers, determine what and how you can satisfy customer demand with inventory on hand and how much you will need to manufacture. Can you preserve cash by adjusting your minimum inventory levels and still meet expected demand and service levels? In some cases, the answer will be yes.

Can you preserve cash by adjusting your minimum inventory levels and still meet expected demand and service levels?

3. Make sure physical inventory matches what is on the books.

To get an accurate read on inventory needs, you must ensure inventory on your books matches what’s on your shelves. If your cycle counts are always accurate, then this is probably not an issue. But if you have a history of unreliable counts or significant year-end adjustments, go out and manually perform a spot check or even consider doing partial physical of key parts. Make sure what your books show reflects reality so you can meet fill rates and make smart decisions about resources.

4. Know your cash float.

It’s a deceptively simple step, but one we often see overlooked. Your bank ledger balance doesn’t tell the whole story; you need to know how much cash you actually have available to use (after deducting outstanding checks and other adjustments). And don’t try “playing the float” — it almost always comes back to surprise you, and it’s never a pleasant surprise.

5. Talk to your bank and keep your eye on debt covenants.

Talk to your banker about the steps you’re taking to actively manage cash flow and liquidity. Your banker will want to know what your stakeholders and customers are saying and doing. Be prepared to share your current liquidity situation and projections. Do you have a 13-week cash-flow projection? If not, put one together now so you can have more productive banking discussions.

Banks don’t expect perfection, but they do want to know what’s going on ahead of time.

Keep a particular eye on debt covenants and, if at all possible, meet them. If you know you’re going to violate one, communicate with the bank beforehand, and let the lender know what you’re doing to mitigate the issue. Then maintain an ongoing dialogue about the future. Banks don’t expect perfection, but they do want to know what’s going on ahead of time. These discussions can mean the difference — should you run into trouble — between being a customer that they want to keep and one who is encouraged to find a new lender.

6. Talk to suppliers.

Approach your largest suppliers first as well as the ones that are hardest to replace and without whom you can’t run your business. You’ll want to assure them they’ll be paid (even if it may take setting up extended payment terms), and you’ll also want to understand what’s happening with their business, including with their suppliers. You need clear visibility into your supply chain to anticipate additional disruptions. Do your best to understand the extent of those disruptions and the mitigation plans your supply chain is putting in place.

Talk to suppliers often. If you’re stretched too thin, divide and conquer by having your purchasing and finance leadership conduct these calls. But make sure to have them because in the absence of information, rumors fly — and they’re often worse than reality.

7. Employ creative problem-solving.

In times of crisis, it’s easy to let fear or denial lead to poor decision-making.

We recently spoke with an automotive parts manufacturer that was considering temporarily closing operations completely, faced with the very real prospect of losing 70% of revenue. Instead, we suggested talking to their non-automotive customers to assess their needs. The company developed new projections for what it would take to operate at 30% capacity. Profitable? No. Enough to offset some fixed costs and improve chances of making it through? Yes.

Taking this a step further: With clear enough customer demand, this business could run its shop at 60% for two weeks, build product, shut most of its operations for a period of time, and then run on just a skeleton crew to reduce forecasted losses.

Another business was in the throes of painful decisions about layoffs. As part of our analysis, we encouraged leadership to look closer at the C-suite’s total compensation and what types of sacrifices could be made. This accomplished two important things: It further reduced the company’s break-even point, and it set the tone for the workforce going forward. When leaders make significant personal sacrifices to save the business, the employees are willing to step up and commit to the business as well.

Challenge all your assumptions and don’t be afraid to seek third-party input. Outside experts have seen similar scenarios play out across hundreds of companies — and, equally important, they don’t bring preconceived notions about how the business “should” or “has always” run, which can limit innovative thinking. These are unprecedented times.

8. Generate a cash-flow war room mentality.

Make sure you’re constantly monitoring liquidity. Add more key performance indicators to your management dashboards and reports. Know exactly how much you have available to borrow on lines of credit and what large payments are due from customers.

Share the data with key staff to reinforce the importance of cash flow. Armed with information, they can help. For example, if your sales director is talking to an important customer, they can confirm that you’re still on track to receive payment. Pre-COVID-19, that might have been a conversation left for the CFO. Now, it takes a more coordinated strategy.

Liquidity buys time.

As you continue to monitor and strategize, stay focused on identifying additional ways to reduce your cost structure and break-even point. Be clear about the distinction between needs and wants, and take appropriate steps to prioritize the needs and set aside the wants. Take a hard look at which bills and commitments must be paid (and when) and which ones can be reduced, deferred, or paid in installments — even if you incur a penalty. You can always negotiate.

All of these strategies can be easily missed in challenging times, but they do make a difference. They help the management team gain clearer insight into decisions, vet new opportunities, and reassure employees and external stakeholders about the way forward, whatever it may be. Remember, there are two stark options: Do nothing, and operate for a given period of time until cash runs out; or take measures to optimize cash flow and liquidity and extend that timeframe, likely significantly.

Stay focused on identifying additional ways to reduce your cost structure and break-even point.

These measures, and the reassurance they enable, are crucial right now. They can convince suppliers to keep doing business with your company, customers to continue placing orders, and lenders and investors to continue their support. Cash flow and liquidity buy time, and to weather a crisis, it’s all about playing for time.

Wondering about cash flow and liquidity during the COVID-19 crisis, including using the tools above, or how to create a 13-week cash flow projection? We’ve made free tools available to help businesses optimize liquidity and assess financial health and resilience.

We're here to help. Our COVID-19 task force is standing by to provide complimentary guidance to help you respond, restart, and be ready.


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