Management teams should consider these three key steps as they seek to stabilise their cash position:
- Understand the current financial position
- Take action to protect the position
- Manage internal and external stakeholders
As you perform these assessments and actions, you might identify issues which are risks to your going concern.
Alongside managing cash challenges, companies must keep directors’ duties front of mind. They need to ensure they avoid trading risks and seek appropriate advice during this period of uncertainty.
Here, we break down how to approach the key steps for you, and highlight some considerations.
Understand the current financial position
In a critical situation like COVID-19, a business may need to make an assessment of available and trapped cash in a matter of weeks, or even days. Your ability to respond quickly is essential.
- Assess the potential short and medium-term financial implications of COVID-19. Focus on liquidity and covenants
- Create or review your immediate 13-week short-term cash-flow forecast
- Update your business plans, budgets and forecasts
- Identify potential worst-case scenarios
- Perform sensitivity analysis, modelling worst-case scenarios and downsides, inclusive of the impact of FX on your cash position
- Test the capability of your existing reporting tools and systems. Do they allow real time reporting across multiple locations?
Funding flexibility or capacity
Review your finance documentation. Identify if there is:
- Flexibility on covenants, cures, force majeure or baskets
- Additional borrowing capacity and unencumbered assets: inventory, receivables, intellectual property
- Any scope to access government funding initiatives
- Update your financial position and resource planning analysis to assume staff sickness
- Assess where and what levels of tactical cost reduction and cash conversion or stock liquidation could be undertaken, if that were required
- Develop operational contingency plans to minimise disruption to your business. Include reviews of authorised personnel to manage bank and system processes and controls
- Review your key supplier and customer contracts
- Identify if there is contractual flexibility to amend payment and pricing terms for both sides. Engage with suppliers and customers accordingly
- Reassess payment priorities and consider time to pay arrangements
- Consider the position of other key stakeholders, e.g. shareholders, pension trustees, regulators, credit insurers and credit card companies
- Check insurance policies for business interruption clauses
Take action to protect the position
Once you have clarity on your cash position, your directors and management teams should take immediate action to ensure they can, at least, maintain it. You should also identify opportunities to access new money, if that should be required.
- Implement cash conservation measures. That might include cancelling non-essential orders, shift rationalisation and four-day working weeks
- Optimise your working capital to preserve liquidity
- Seek additional funding support from existing lenders, new funding from alternative providers. Are there opportunities to generate cash via equity release?
- Obtain consent from lenders for short-term financial covenant waivers or relaxation in anticipation of potential covenant breaches
- Implement rapid cost reduction plans based on your financial position. The severity of cost reduction levers and time execution will be dependent on available liquidity
- Set 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
- Depending on the severity of the situation and size of the organisation, consider bringing in a Chief Restructuring Officer (CRO) to have responsibility for taking control of the cash position
- Consider whether liabilities and cash can be accessed via a managed exit or accelerated disposal process of underperforming parts of the business.
Manage internal and external stakeholders
Besides the key actions above, organisations need to quickly understand who their key stakeholders are, both internally and externally. Management of stakeholders can often be challenging in a stressed scenario, particularly where interests are conflicting and there are significant 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.
- Internal channels: your staff
- External channels: your stakeholders, customer, suppliers, shareholders, government, market
Identify all key external stakeholders. Engage early and proactively manage them. Understand their current position. Consider how they may act and any associated issues which may arise.
Assess the impact of cash position issues on your business and work with the stakeholders to minimise or mitigate their impact.
- Financial stakeholders: banks, bondholders, rating agencies, auditors, pension trustees, credit card companies
- Operating stakeholders: landlords, suppliers, customers, credit insurers, insurers, regulators
Keeping directors' duties front of mind
In the event of financial and liquidity stress, directors must move their attention away from shareholders towards protecting the interests of creditors to avoid reckless or (in extreme circumstances) fraudulent trading.
In recent years, in the UK and Ireland, we have seen directors' duties in large companies under the spotlight. They have been subject to public scrutiny in instances of financial stress, particularly in situations which lead to insolvency.
The ability of a company to avoid insolvency is not always immediately obvious. As a result, it is imperative that Directors understand their roles and responsibilities, and consider this when making critical business decisions.
Financial and liquidity crises often create competing demands on the limited cash a company has available. Directors are often uncertain as to the right decisions to be making in the interests of the stakeholders. We recommend that Directors take the following steps:
- Seek professional advice: directors need immediate and ongoing advice on their responsibilities and exposure
- Consider your financial position: directors need a clear view of cash flow, alongside balance sheet position and trading performance. This analysis should be reviewed and updated on a frequent basis and used to inform trading decisions
- Maintain evidence of your decision-making process: ensure all material decisions and the associated considerations are documented in detail
- Consider ceasing of trading: in extreme circumstances where stakeholder support is not forthcoming, contingency plans may be necessary to help directors understand the options available to minimise loss to creditors
How we can help you
Our Business Restructuring Services and Deals team can support you as you face the challenges that COVID-19 presents in time-sensitive and critical scenarios.
- Financial restructuring: Financial advice to corporates, sponsors, lenders and credit funds in assessing options and negotiating and implementing a restructuring
- Working capital management: Creating and implementing initiatives to release working capital and create liquidity at pace
- Independent business reviews: Rapid commercial and financial due diligence focussed on the key issues for lenders or corporates normally in support of a refinance
- Accelerated M&A: Using corporate finance, restructuring and insolvency skills to maximise value through the sale of shares, businesses or assets in a short time frame
- Debt and Capital Advisory: Helping companies engage with financial institutions to raise debt for a range of business needs
- Insolvency: Providing insolvency solutions in implementing a financial restructuring, including taking appointments and contingency planning advice