COVID-19: Finance and liquidity considerations

05 May, 2020

A direct result of COVID-19 is the increased need for businesses to protect their liquidity and financial stability. Reacting quickly to changing cash and working capital needs is crucial at a time when operations, markets and revenue may be in flux.

Across all sectors there is a rapid shift in working capital requirements, driven by disruption of both supply and demand. Normal lead times and replenishment frequencies are elongated even for regional supply chains, meaning safety stock and inventory policies need to be adapted. Payment morale as well as credit worthiness and insurability are impacting the ability to get paid or trade.

There is a clear need to take rapid action to change operational ways of working to protect working capital and ensure more accurate cash-flow forecasts in these uncertain times.

Key considerations for your finance and liquidity planning

What to do now
What should you do next?

What to do now

Understand your current position and begin financial projections

In a crisis like COVID-19, you need to assess the short- and medium-term financial implications on your business. There will be effects on your operations, and your ability to prepare, project and respond is essential.

Review your short- and medium-term cash flow forecast
Make financial projections based on a range of scenarios
Update your business plans and budgets
Focus on liquidity and covenants
Test the capability of your existing reporting tools and systems

Model your cash needs for the next three to six months. A robust forecast will identify trigger events and will quantify the impacts on your business. Triggering events may include borrowing-base deterioration, or a covenant breach. Determine whether your existing processes and tools can properly model the impacts. If not, this is the time to make process improvements and look for opportunities to deploy digital solutions.

Projections and forecasts of future cash flows are a key component of this crisis planning. Your financial projections should contain assumptions based on your scenario planning. Explore different scenarios and what-if analysis, such as a drop in sales or a reduction in revenue. Be prepared to revise them regularly. Scenario planning will give you confidence to make decisions and shape communications about your response strategy.

You need to review and reassess your financial projections often to incorporate the updating impacts of COVID-19. This may include impacts arising from restrictions on operations, supply chain disruption and customer demand. Perform sensitivity analysis and model potential worst-case scenarios. Be sure to include the impact of foreign exchange fluctuations on your cash position. Develop operational contingency plans to minimise disruption to your business.

Assess where and what levels of tactical cost reduction and cash conversion or stock liquidation could be undertaken. Include reviews of which authorised personnel can manage your bank and system processes and controls.

Review your finance documentation, and identify if there is any flexibility built into your loans or covenants. Is there scope to review your borrowing capacity? Assess the value of unencumbered assets such as inventory, receivables and intellectual property. Do you have scope to access government support and funding initiatives?

Take action to protect the position

Once the cash position is clear, leadership and management teams should take immediate action to ensure they can maintain it. Optimise your working capital to preserve liquidity. Are there any opportunities to access alternative sources of cash, if required? Are there any cash conservation measures you can take now? This might include cancelling non-essential orders, shift rationalisation and four-day working weeks.

Seek extra funding support from existing lenders, or new funding from alternative providers. Are there opportunities to generate cash via equity release? Get consent from lenders for short-term financial covenant waivers or relaxation in anticipation of potential breaches.

Implement rapid cost reduction plans based on your financial position. Consider setting up a programme management office (PMO) to help ensure consistency in managing the impact of COVID-19. This will enable rapid responses to deal with operational and financial issues as they arise.

Manage internal and external stakeholders

Management of stakeholders can often be challenging in a stressed scenario. This can be challenging where interests are conflicting and there are demands for real-time information.

Develop a clear communication plan to ensure consistent messaging across all channels. Consult with internal risk and marketing teams, as appropriate.

Identify all your key external stakeholders. Engage early and proactively manage them and their expectations. Understand their current position, consider how they may act and any associated issues which may arise. Work with the stakeholders to minimise or mitigate the cash flow impact.

What should you do next?

Evaluate your financial reporting requirements

For most companies that have a 31 December year-end, direct financial effects of the pandemic may first be reported in Q1 or half-year filings. Your business should consider the impact of COVID-19 on estimates and judgments contained in your financial statements and how these have affected the measurement of assets and liabilities.

Evaluate the breadth of impact considering both direct and indirect effects. Each element of financial reporting impacted by the outbreak may have specific disclosure requirements. Ensure you remain aware and up to date on any specific reporting requirements that relate to your business.

The impact, both current and expected, of the pandemic should also be reflected in cash-flow projections used to assess the more long-term viability of your business as a going concern. This can be challenging given the level of uncertainty so modelling of possible scenarios may be required.

Consider any impact on a future audit

Companies should also consider a discussion with their external auditor to determine if the completion of audit or review procedures has been impacted by the COVID-19 outbreak.

Plan how you communicate your financial position

You need to consider the need to discuss the impact of the coronavirus outside of your financial statements, what you say and how it is said. Be clear about how you communicate risk factors, and how management discusses any analysis of results, liquidity, and capital resources including consideration of trends and uncertainties.

Review your insurance position

Review coverage and limits of any business interruption insurance. Determine how to substantiate lost revenue or income and over what period of time this might apply.

Identify other substantive impacts

The applicable financial reporting requirements should be considered as part of any discussion around restructuring, relocation of operations or personnel (temporary or otherwise), and other actions taken by the company as a result of the coronavirus outbreak.

We are here to help you

As events continue to unfold, we know that the operational, financial and liquidity challenges you face are mounting. There's no doubt that the weeks and months ahead are going to be challenging and the priority now is ensuring your business can ride out the impact. We are ready to help you with: