Managing Cash Flow During COVID-19

Given the importance of cash flow in times like this, companies should immediately develop a treasury plan for cash management as part of their overall business risk and continuity plans. In doing so, it is essential to take a full ecosystem and end-to-end supply chain perspective, as the approaches you take to manage cash will have implications for not only your business but also for your customers. 

Borrowing from the lessons learned from the SARS outbreak in 2003, the 2008 recession and credit crunch, and the last black swan event to significantly impact global supply chains–the Japanese earthquake of 2011–we offer the following practices and strategies for consideration: 

Ensure you have a robust framework for managing supply chain risk. 

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.

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.

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 minimise 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 organisation.

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.

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. 

Revisit capital investment plans.

With cash flow forecasts in mind, consider what’s really necessary for the near term. What capital investments can be postponed until the situation improves? What capital investments should be reconsidered? What capital investments are required to position for the rebound and for creating competit