Managing cash flow during COVID-19 - Crowe Ireland

Managing cash flow during COVID-19

18/03/2020
Managing cash flow during COVID-19 - Crowe Ireland

The COVID-19 pandemic presents unique challenges for business owners. In these uncertain times, the cash and liquidity needs of a business are paramount. Managing cash is now a critical priority and an essential part of any survival plan. 

Our advisory team outline a range of measures business owners should be considering from an operational and a financial standpoint to try to mitigate current or potential risks.

As we write the situation is evolving and it is clear that government and European support is likely to be both substantial and far reaching. Notwithstanding this, compensation in whatever form is unlikely to fully mitigate the cost. Therefore change will be necessary and is vital if business owners are to retain control and bounce back stronger than before. Thus, to be successful over coming months you need to be both conscious of regaining control whilst preserving the long-term value of your business.

Understand your cash and working capital needs 
For many businesses cash flows are already being devastated as revenue evaporates. It will be important for business owners to fully understand what their cash flow looks like in the short term. Try to document all your payments down to the day to get a complete picture.

Run scenario analyses to understand how potential disruptions to operations may affect liquidity in the medium term. Test all assumptions to make sure they are correct and model a downside scenario to understand potential risks – that includes understanding how much of any forecast belongs to existing clients and how much of it relies on new client acquisition.

Assume this crisis will not be over for months and map out what you need. Should cash flow forecasts suggest that liquidity is or will become an issue, assess options for raising funds including revolving credit instruments, leases, mergers or other alternatives.

Cost deduction – be relentless on cost control
Review fixed and variable costs carefully and determine what costs you actually need to run the business. Assess your capital expenditure requirements and defer non-essential spending where possible. Try to convert fixed costs to variable costs – for example lease equipment don’t buy.

Be strategic and do not execute cost-cutting initiatives that could compromise revenue generating capabilities or that risk diminishing value in the business.

Communicate early and often with your bank or finance provider
Your existing lender could be your fastest source of additional liquidity – they know you and your business best. Communicate with them early and often, explaining any situations that may arise and the actions you propose to address them. Open transparent communication is the best approach. 

Review your lending documents and be sure you fully understand the key terms, obligations, covenants and flexibility in your banking and finance contracts. There may be scope to reduce payments on existing facilities in the short-term by agreeing an interest-only payment profile for an interim period.  

Talk with your suppliers
Talk to your regular suppliers and be honest. If they are not impacted they might be in a position to help.

Assess the ability of affected suppliers to continue production and supply. Make contingency plans for alternative supply in the short and medium term.

Where possible, negotiate for the most favourable credit terms with suppliers and critically evaluate your supplier base to determine if your current agreement is still the most favourable for your business.

Keep in contact with your customers
Go through your customer list and see who is most likely to be most affected and when. Understand fully what the impact on revenue would be from reduced sales and the cash flow implications from delayed payments. 

Follow up on all debtors as a matter of priority. Make sure your invoice is top of their list.

Take care of your existing customers / clients 
Now is the time to look after clients you have rather than chase prospects. With additional capacity in your business put in the extra effort to add more value and make these current customers ones for life.

Communicate with Revenue
Revenue have announced details of the measures introduced to assist SMEs experiencing difficulties during the crisis. Keep your liabilities to Revenue under review and keep track of any further measures announced.

Remain cognisant of any freezes on VAT payments that may be introduced over the coming months. Availing of any such measures will afford you some breathing space as your business strives to return to normal trading conditions. 

Speak to your insurance providers
Check if your insurance policy covers you for an interruption in your business, or a temporary business closure, caused by Covid-19 and look to reduce your premium by adjusting your coverage to property only.

Your insurance policy may include an “unoccupied premises warranty” clause. You should review your policy to ensure this clause is adhered to if your property is closed. Such clauses may include warranties that frequent inspections of the property are carried out when it is vacant.

Review your pricing and credit terms
Do not assume your customers are financially healthy. Re-evaluate credit terms with current customers, negotiate the shortest reasonable terms, and carefully review the credit-worthiness of each new customer before extending credit.

Think about how you can get paid up front. Now is the time to tighten up your payment terms, not loosen them. Offer a discount for upfront payment. Try to get payment in stages rather than at the end of a project.

Explore your options around creating some liquidity on your balance sheet through invoice discounting or factoring. Invoice discounting will enable you to borrow funds using invoices as security while factoring is when a business sells invoices to a third-party at a discount to actual value. Assess the optimal approach from both a cash flow and operational perspective.

Review your business terms and conditions
Chances are your contract terms and conditions were written at a time when you were a smaller-sized company and when cancellations were few and far between. It may be time to update your cancellation clauses with more realistic lead times and fees that accurately reflect the impact that multiple cancellations might have on your business.

Reducing payroll costs
If you have significantly less revenue coming in and reduced prospects, you may need to be realistic about cutting some of your workforce or at least reducing the payroll. A painful option for any business owner but the viability of your business may rely on you taking early action. Here are some options to consider: 

  1. A reduce working week. For example, reducing to 3 days a week might be a viable option for a period of time.
  2. Salary cuts might be necessary. Try to secure agreement amongst your senior staff to be the first to take the cut.
  3. Cutting staff numbers. If you are forced to lay off employees, be transparent and fair. Ensure your employees are aware of the various Department of Social Welfare supports available.

Examine government supports 
There are a range of government supports in place. Keep track of future announcements to see which might suit best to your company’s needs. 

On the flipside, don’t wait for the government to rescue you – their support alone cannot get you through this. Tackle your own affairs as if there was no government help coming and treat any help as an unexpected bonus.

Here are a number of the current supports available:

€200m SBCI working capital scheme for eligible businesses
www.sbci.gov.ie

€200m package for Enterprise Supports through Enterprise Ireland
www.enterprise-Ireland.com

Loans up to €50k for small businesses where a reduction in turnover is projected at over 15%
www.microfinanceireland.ie

Credit Guarantee Scheme through SBCI. Loans of up to €1m at terms of up to 7 years.
www.sbci.gov.ie

Contact our advisory team who are here to help any business facing challenges during this COVID-19 crisis.

Contact us:

Naoise Cosgrove, Managing partner - Crowe Ireland
Naoise Cosgrove    
Managing Partner
Corporate Finance
Partner, Corporate Recovery - Crowe Ireland
Aiden Murphy  
Partner
Corporate Recovery
Gerard O'Reilly, Partner, Audit - Crowe Ireland
Gerard O'Reilly  
Partner, Audit