Crisis planning: Managing cash flow is king

With the level of disruption that companies are facing, and the added challenge of the Ukrainian Conflict which will have an added impact to the current global supply chain crisis, companies are well aware of the indicators that point to the fact that they may be facing financial distress.

It is one thing being aware of these indicators, reacting to them in an appropriate manner is another matter altogether. Over the past few months; Turnaround Talk has published several articles discussing cash flow and how it is one of the primary indicators that a company is either in financial distress or is approaching financial distress.

But how do you respond to this pressure, how do you manage cashflow effectively during a crisis? Deloitte recently published a report which discusses this in detail. We will focus on the first five coping mechanisms this week.

Ensure you have a robust framework for managing supply chain risk
The report points out that 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?

If you manufacture a product and want to sell it to someone outside your borders, you typically require a letter of credit from a prime bank that proves the buyer can pay. This letter of credit not only provides a source of ultimate payment, it can also be used to secure inventory financing while the goods are in transit—so it’s important to make sure these letters of credit are still reliable. Ensuring you understand the financial risks of your key trading partners, customers, and suppliers is a critical consideration in times like these.

Ensure your own financing remains viable
The report adds that, 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.

Focus on the cash-to-cash conversion cycle
The report points out that, 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.

Think like a CFO, across the organization
The report adds that, 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. More often than not, 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?

Revisit your variable costs
The report points out that 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. And, if necessary, consider offering voluntary, or even involuntary, leave without pay to preserve cash.

The role of the BRP
It is no coincidence that business rescue and turnaround professionals tend to have either a legal or an accounting background that they can turn to when crafting business rescue and turnaround plans.

The role of accounting professionals in the business rescue and turnaround profession is vital. It is therefore important that industry associations such as the South African Institute of Chartered Accountants (SAICA) and the South African Institute of Tax Professionals (SAIT) are run by the best skills that the country has to offer. As custodians of the profession, these associations make sure that members are fully accredited and maintain their qualifications through CPD.

It is therefore vital that BRPs who are members of SAICA or SAIT hold these associations to the highest level and expect nothing less than strong, ethical and highly skilled leadership steering these ships. A Titanic situation in these associations will have future ramification for what is fast becoming a key profession.