Fit for cash flow resilience

Respond

As from our analysis, cash flow volatility is one of the main threats in the short-term. This also has a cause-effect relationship with supply chain and customer disruptions, thus action steps should be taken in combination with each other.

We cannot avoid the difficult cash & financial situation, however we can try to adapt, minimize its impact and show resilience in the face of this crisis. Below we have determined the main actions that enterprises can employ:

Put emphasis to finance management

Traditionally, general approach to the finance function from Albanian enterprises has been confined within the role of accounting and controlling. This has to change drastically. Finance should analyze risks and impacts growing from supply and the wider business domains. Emergency financial plans should be made, targeting financing options, payables/ receivables, inventory, working capital and fixed costs.

In order to do that, companies must think as operations managers and think their whole market chain. Unilateral actions, initially deemed good for one enterprise, shifting risks and financial burdens to their clients or suppliers, may backfire later. Market awareness and communication is imperative. coordination of efforts can make a difference in the case of limited resources, funds and outside aids,.

Change focus from Profit & Loss to managing cash conversion cycle

In normal times, the main objective of enterprises is maximizing profit. This crisis is showing that enterprises should change behavior. In the short-term, cash is priority and will make the difference. Enterprises should break down the three components of cash conversion cycle: Payables cycle, Receivables cycle and Inventory cycle. In order to overcome short-term cash difficulties, integrated actions must be taken between these components.

Relief from payables and manage receivables

Payables and receivables structure in Albanian enterprises make for a large part of short term debt-assets making tight interconnections along the market chains. Failure to one link can distribute along the whole chain, and now the risks are becoming more eminent increasing on a daily basis, revealed the Benchmarking analysis.

 

Therefore, companies should improve their cash balance by trying to delay payables. However, this should be done in a smart way. Unilateral decisions in such case can damage supplier relations and put excessive burden to them, backfiring and leading to the situation that was meant to be avoided. The better way is to communicate with suppliers, coordinate planning for cash and products and reach an agreement that minimizes damage to both parties.

The same goes for managing receivables. Where possible, companies should try to collect receivables in the shortest amount of time. As clients may try to delay their payments as well, mutual coordination and planning is imperative. Being more restringing on receivables may be beneficial for the needed cash, but being too restringing may cause difficulties and losses in customers leading also to future downturn of revenue and cash.

We cannot emphasis enough that communication and cooperation from supplier to customer to plan better and show resilience is highly important. In that regards, the use of digital communication and non-traditional channels are the norm in this situation.

Manage inventory

We will discuss inventory measures more in depth in the supply chain implications. However, finance should play a key role to that regards. Inventory is a key component of the cash cycle. Usually it is managed commercially to balance supply and demand. In this crisis, proper supply & demand risk analysis should be conducted to design emergency inventory strategies. Among other measures, finance should aid other functions to analyze quick wins to improve cash standing without sacrificing customer service.

Re-plan financing options in crisis situation

Our benchmarking and financial health analysis back then concluded that the low financial health companies exhibited many structural issues and risks. They operated in high short-term debt financing.

Financing and debt per Financial Health rating, Benchmarking Analysis

That may be still relevant and pose serious threats to the wider economy. Given that, the shocks that this crisis may bring, can be devastating for the financial health of companies, especially those in more affected industries.

Thus, affected companies should review their financing options first within their . Where possible, emergency reserves or capital financing should be ready in case the situation worsens.

Enterprises should also review loan restructuring, increasing maturity and grace period options that can bring ease on cash issues until the recovery phase. Also possible government guarantees for loans should be considered as viable options.

Restructure cost and cut expenditures

Enterprises should initially try to optimize variable costs. Holding hiring and restricting non-essential activities such as training, entertainment, un-necessary meetings travel can be viable options. In addition, analyzing demand and supply risks in order to shift inventory & production to products with less variability in demand can benefit the cost structure.

Another measure that can be explored is restructuring fixed costs. Possibilities to transform fixed costs to variable can be beneficial for improving cash balance. If the crisis enters a prolonged scenario, selling assets and leasing them back, contracting services, fleet leasing can be possible options. This can be done by optimizing services and then outsourcing them through Service Level Agreements to benefit cost efficiencies.

Explore new revenue streams

Enterprises should think of diversifying and adding new revenue streams from:

  • New products,
  • New destinations for current products,
  • New ways of using assets to generate revenue.

This is especially important for enterprises on seasonal and perishable goods such as agriculture. Perishable products that have temporary lost their markets can possibly be processed to lengthen their lifecycle and explore new markets. Also enterprises focusing on exporting goods can think of what changes can they make to shift their products to the internal market.

Furthermore, enterprises should think on how new revenues can be generated from current assets, for example: free warehousing space can be sold to enterprises that are temporary thriving in this situation; or production assets can be shifted to produce goods that are more necessary at the moment. As well, new channels can be utilized to sell products such as online sales channels and home delivery.

This not only will generate more revenue and reduce the need for drastic cost cutting, but also can prove a viable new business model in the future.

For any issues or advice you can contact our Deloitte team.

 

References:

  • Deloitte 2018, Benchmarking analysis on the Albanian Market;
  • Deloitte 2020, Addressing the financial impact of COVID-19;
  • Deloitte 2020, The heart of resilient leadership;
  • Deloitte 2020, COVID-19: Managing cash flow during a period of crisis.
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