Far worse in terms of economic impact than the US-China Trade War , the Covid-19 pandemic is a black swan event that is likely to surpass the 2007-8 financial crisis.
Starting with factory closures in China, the level of global supply chain activity has fallen off steeply: new trade barriers have risen for air, land and sea cargo, cash-strapped companies have put investment plans on hold and threats to jobs and a regular income have hammered consumer demand.
The latest forecast from McKinsey and Company shows most global economies not returning to pre-crisis levels until Q4 and anticipates recessionary conditions, with US GDP shrinking between -2.4% and -8.4%; the Eurozone down by -4.4% to -9.7% and the World economy declining -1.5% to -4.7% during 2020. The global nature of trade means that there will be an immediate knock-on effect on Asian business, as illustrated by this study which found that 27% of the decline in American demand and 18% of that in the European Union was borne by foreign producers.
With no immediate end in sight as the virus continues to spread worldwide, many companies are unfortunately going to fade away due to rapidly changing market circumstances that are largely beyond their control. However, those who take the right action now can significantly increase their chance of business survival and even emerge stronger from the crisis.
Here are some essential Cash Flow Management steps for Asian manufacturers and exporters to ensure business continuity in the face of the fast-approaching economic downturn driven by Covid-19:
Don’t Delay – Talk to Your Bank Manager
While company operations provide plenty of opportunities for cost-cutting by introducing accounting best practices, improving cooperation with suppliers and clients and considering alternatives in supply chain finance, the most important first step is to talk to your bank in order to secure the maximum available credit facility.
When customer confidence falls and business slows, cash reserves are essential to ensure company survival and bank borrowing is an important support mechanism. However, the availability of loans can be uncertain at the best of times and it is important to be aware that many larger companies with pre-arranged credit lines are already topping up their liquidity in order to maximize their chances of survival. According to a recent report in the Financial Times, ‘more than 130 companies in Europe and the Americas (including AB InBev, Delta Airlines, Expedia, Ford Motors, GM, Hilton Worldwide and Kraft Heinz) have drawn USD 124 billion from credit lines in the last 3 weeks.’
Take a lesson from these blue chips and talk to your bank now. This responsible approach is always preferable by addressing potential cashflow problems in advance before the situation takes a turn for the worse. And remember that at a certain point in any crisis banks will stop lending, so make the effort to get ahead of local companies facing similar circumstances.
Review Operational Expenses
Knowing that the market is likely to get worse over the coming months and that a fall in sales revenue is almost inevitable, a review of all costs is recommended with a view to cutting unnecessary business expenses. In particular, recurring costs represent an obvious drain on cashflow that should be carefully analysed. Companies are advised to avoid or delay major investments and pay particular attention to the Net Present Value of any expenditure to evaluate future cash flow from new projects and the expected payback period.
Remember: Cash Flow Is King
Cash flow reflects the net amount of money coming in or going out of a business and operations, investments and daily financial activities must be balanced to keep the company afloat. Cash shortages hamper operations and hinder growth, often causing owners to make short-sighted decisions that can hurt the business in the long term.
As explained in this blog post introducing the basics of Cash Flow Management, it pays to maximize the use of software tools which give a broader, real-time assessment of a company’s financial situation. Management accounting techniques are applied and financial ratios tracked to regularly assess the liquidity position of a business.
Analysis of a company’s Cash Flow Statement often underlines an important gap between the value of product sales to customers (often shipped on generous terms of credit) and payments to suppliers (more quickly made after goods are produced). If the credit terms provided to debtors (customers) is longer than to suppliers, businesses may have to cover the discrepancy by using their cash reserve. This can be a significant factor contributing to poor cash flow.
Negotiate Better Terms with Suppliers and Customers
The improved visibility provided by more rigorous financial analysis informs important decision-making and partnership discussions with both Suppliers and Customers.
If the Cash Conversion Cycle indicates that suppliers are paid too soon then this leaves a gap to be financed before customers settle their invoices, then terms can be renegotiated. However, it is important to remember that the finances of smaller manufacturing Suppliers tend to be less secure than larger clients in European or US markets, so there may be less flexibility available – especially in difficult market circumstances such as those created by Covid-19.
Customer contracts have a much more significant impact on Cash Flow than those with Suppliers and, in the face of the current market uncertainty, a sensible first step is to request shortened payment terms from all Customers as a matter of standard practice.
Maintaining close Customer relations is never more important than in times of crisis. By keeping all parties forewarned of potential difficulties, sudden surprises can be avoided and, in the case of cash flow difficulties, a full explanation can help an early resolution of the problem.
Consider Invoice Discounting to help preserve Cash Reserves
If cash continues to be a concern, Invoice Discounting should be given serious consideration as a way of raising funds by selling invoices to an online platform such as Velotrade.
The business quickly receives a cash injection to pay suppliers, employees and cover operational expenses, and can keep the remainder in reserve. This approach shortens the Cash Conversion Cycle and ensures that sales inventory is quickly turned into cash to support more effective Cash Flow Management
Be Better Prepared with Disaster Planning
In times of crisis, company staff need to create a detailed contingency plan which takes time and resources that are not readily available. The more effective approach is to consider various scenarios in advance, when a more detailed analysis of strengths and weaknesses can be conducted and a more methodical strategy developed.
This approach improves peace of mind among team members and prevents panic when the next unexpected problem occurs. When disruption finally takes place once more, employees will feel empowered to respond more effectively by following a tried-and-tested plan, resolving the issue as efficiently as possible and minimizing company losses.
If you are already facing too many issues right now with Covid-19, remember that once it’s over, a Disaster Planning programme might be the best way to prepare for future issues.