Cash Management in a crisis

The outbreak of COVID-19 and its impact on our lives and the wider trading environment has placed extraordinary pressures on businesses in the UK.

Article published date- 01/09/2020

Read time -14 mins

Almost every sector of the economy has been impacted, with smaller businesses suffering particularly.

Whilst government support for business is available, businesses can implement a number of actions themselves to preserve cash and minimise potential funding requirements in this uncertain environment. A requirement of any funding request, may include the need to demonstrate the actions the business has already implemented as well as other potential levers available if the outbreak continues in the longer term.

We know from our clients, that businesses are experiencing delayed payments from their customers and, as a result, are delaying payments to their own suppliers. The tightening of liquidity then causes challenges throughout supply chains as cash conversion cycles lengthen.

The ability to act quickly with some cash preserving and cost reduction measures, will allow further time to understand more fully the impact on businesses and plan accordingly. Buying additional planning time may delay the need for more extreme measures and will enable more time for communication with lenders, customers and suppliers; all of whom will be critical in this period.

Understand your cash position

Prepare a simple receipts and payments cash flow forecast covering the next 13 or even 17 weeks. This will provide a baseline cash position for the business over that period. In preparing the cash flow forecast, you will gain greater insight into the drivers behind cash inflows and outflows of the business. A robust cash flow and financial forecast will be an important element of any discussion for external support.

Variance analysis will allow you to monitor the accuracy of the cash flow forecast and whether you need to update any underlying assumptions. As this is a working document, it is essential it is updated and rolled forward on a weekly basis to continue to give the business a reasonable view of liquidity in the business.

Look at ways of reducing cost and cash outflows

Consider all ways of preserving cash within the business and prioritise these actions based on their impact; none of the options are without consequences for the business. Start with the simple. Review your debtor ledger and ensure you collect all invoices due now. Be proactive in the sending of new invoices and the collection of invoices that are due in the coming days to limit any payment days.

Review any contractual terms to ensure you do not pay any suppliers earlier than agreed. Consider deferring non-essential capital expenditure and other unnecessary costs or non-core activities.

More drastic actions may include deferring other cash outflows, including reducing operations, VAT deferrals, other time to pay arrangements with HMRC, business rate holidays and any lease payments. Early communications with the underlying creditor will be critical before simply withholding payment.

Other areas to consider may include the prioritisation of customers. Contract penalties for delays in supply may require the business to ring-fence stock to ensure there are no fulfilment issues. Alternatively, servicing customers with shorter credit terms and better payment histories will improve cash flow. Either way, communication with customers will be critical in order to manage service expectations.

Scenario planning

Understanding the cash profile of the business is critical during this period. Available liquidity can change rapidly as the business faces a range of operational challenges. A key activity will be ensuring the business maintains an up to date view of its cash forecast as this will determine when to implement any of the prioritised list of mitigating actions.

Scenarios to consider may include the following:

  • Ability to meet existing orders and your ability to get paid based on whether suppliers can continue to provide you with raw materials;
  • Impact of changes to sales pipelines;
  • Longer term inventory planning and product range changes where there is insufficient stock to continue production and supply.

Supply chain challenges, including delays, will require businesses to understand where their raw materials are made or produced, including sub-assemblies and components that are outside of tier 1 suppliers. Have your critical suppliers undertaken a similar review as you could be impacted by indirect sourcing issues.

Understand your responsibilities as directors

As with any period of financial uncertainty and stress, it is important to have clear decision making in fast changing situations. It is crucial to seek expert advice throughout this crisis to understand legal duties and responsibilities.

Communication

We encourage clients and brokers whose clients have cash flow challenges presented by COVID-19 to contact us quickly. The sooner we are engaged to consider fee-free payment holidays and new or increased invoice finance facilities the better. We can also look at any other cost mitigation activities that may help slow down the rate of cash flow burn.

If your clients need urgent support with upcoming payments, talk to your relationship manager as soon as possible.