How to take back control: As business revenues plummet, cashflow has become even more critical

COVID-19 is wreaking havoc in our lives, and for business, the agony won’t be short-lived.

The Prime Minister has outlined three key goals of the government’s response: to protect health, secure jobs and livelihoods, and set Australia up to bounce back stronger when this crisis is over.

However, there is a fundamental trade-off between protecting public health by implementing social distancing and isolation measures, and ‘torching’ the economy as an inevitable consequence of tumbling demand.

An impossible balance must be struck.

As business revenues plummet, cashflow has become even more critical. Companies must control their own destiny and be on the front foot by immediately comprehending near-term cashflows under alternative scenarios to understand how their business may be impacted by the COVID-19 economic shock.  

This is best achieved by preparing a comprehensive and tailored cashflow forecasting model. This resource will allow business owners and managers to have meaningful discussions with stakeholders, whether they be directors, shareholders, lenders, creditors or staff. 

Avoid the tempting shortcut of preparing a static, single-scenario profit and loss budget. This approach misses the mark in many ways. In an uncertain environment, it is crucial for stakeholders to seek a scenario-based integrated ‘three-way’ financial model of profit and loss, balance sheet and cashflows to understand the complex matrix of financial impacts on the business.

Management must contemplate multiple ‘what if’ scenarios, including the most extreme cases.

What if demand does not normalise in six months? What if the revenue model is modified? What if the cost structure is changed? 

Scenario analysis should highlight the focus areas for the business and identify the appropriate steps to take.  

It’s important to note that profit and loss typically differ to cashflow, sometimes materially. 

Avenues to manage cashflow may include flexing or standing down parts of the workforce, reducing or shutting down capacity, managing inventory levels, or deferring capital expenditure. Some businesses will also be accelerating the collection of receivables including debt factoring, negotiating payment terms with suppliers, and conducting sales and leasebacks of assets.  

Conducting a balance sheet analysis is also critical to understand the impact of assumptions and scenarios on working capital requirements, debt load and covenants.  

Depending on what the cashflow modelling reveals, companies will want to target the big impact measures to manage cashflows. While businesses have access to the extra government assistance announced in recent days, companies must remain cognisant of the timing of these measures, and how they align with their cash needs, and any requirements for more debt or equity. 

First movers will be best placed to negotiate debt facilities, pre-empt debt covenant discussions or seek equity capital.

An integrated financial model is an essential tool to master cashflow requirements and evaluate which levers to pull, when to pull them and under what scenarios.

The time to act is now.

What can your business do to combat the coronavirus?

1. Financial records

Get your financial records up to date to help make informed decisions.

2. Update your financial forecasts

Look at your revised worst-case scenarios and what has to change to meet those forecasts.

3. Review your operating costs

Trim operating costs where you can. If you don’t get to your revised breakeven after trimming costs, trim again.

4. Negotiate with your suppliers

Try and work with your suppliers. Everyone is in the same situation, so have a conversation and try to come up with a mutually beneficial outcome.

5. Bring forward your cashflow

Where possible, bring forward your cashflow. Invoice what you can now; don’t wait until month-end. Sell non-core and underutilised assets.

6. Reduce leave

Encourage staff to take annual or long service leave to reduce the liability on the business. Alternatively, ask employees to take leave without pay to stave off wholesale redundancies which can be costly and place pressure on cashflow.

7. Review staff productivity

Keep a close eye on productivity particularly if you have large sectors of your workforce working from home.

8. Communicate with your bank

Have a conversation with your bank. They will want to work with you, particularly if you have done comprehensive financial modelling.

9. Update your risk management plans

Make sure to have one! Review insurances, cyber security and IT infrastructure. With increasing numbers of people working from home, this will be critical.

10. Monitor both your physical and mental health

Financial stress will affect both. Ensure you and your staff are sleeping, exercising and eating well. Seek further help if necessary.

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