Survival Test of the Cashflow Crunch

4/6/2020

The Covid-19 pandemic has largely grounded the global economy to a halt while exposing businesses to a unique form of stress and uncertainty. Through immediate and potential negative impacts resulting from production and supply chain interruptions, reduction in sales and earnings, longer cash cycles and inability to raise finances that may severely jeopardize an entity’s ability to continue even as going concern during and post the crisis.

Given the continually changing nature of the pandemic and its economic consequences, management must keep abreast by assessing the need to review its strategy and tactics. To survive the crisis, an entity will need to implement its Business Continuity Plan and address the cash generation ability of existing product portfolio, relevance of its existing markets and emerging new segments.

There would be an immediate need to assess an entity’s ability to withstand the cashflow crunch and to meet its debt repayments and other obligations. In addition, what is the impact and availability of other sources of finances, such as government’ economic stimulus and banking initiatives that may assist to fill the gap. Or are there any short-term solutions to generate cash by disposal of non-performing /non-core assets and business units?

Although, the risk-free interest rate may have been decreased in response to the crisis, there may be higher risk premium added due to uncertainty in the entity’s markets, hence which is the most cost effective means to raise finances under the current circumstances?

Will there be opportunities at attractive valuations to defend, possibly increase the market shareand review of existing supply chain sources, processes, and technology? Above all businesses need to re-calibrate their assets, operational bases, fixed overheads and KPIs.

Furthermore, is the capital structure (gearing ratio) still optimal given the stress of external factors such as commodity and foreign currency fluctuations, and extended cash generation cycles due to delays in collections and difficulties of suppliers to provide credit while continue to supply goods and services. Above all, risk assessments and business continuity (BSM) plans need to be reviewed with re-assigned priorities at earliest, since the businesses may be struck with another crisis in future- expectedly or unexpectedly!

 

Arif Choksy

Director – Corporate Transformation

arif.choksy@crowe,ae