Responding to the immediate challenges caused by COVID-19
The spread of the new coronavirus across the world is picking up speed and it is already clear that that there has been an essential impact on global supply chains in many industries dependent on supplies from impacted regions. COVID-19 is significant because it was both unpredictable and it is one of the “macro risks” that can impact an entire industry or extended supply chain, and not just a single company and their immediate trading partners. Businesses are also currently struggling for profitability - especially those with low cash reserves or unstable cash flows - and are particularly vulnerable. In the longer term, companies need to refine their overall supply chain, liquidity management and business continuity strategy with a more holistic view to potential risk.
Future developments are currently difficult to predict. It is therefore important that businesses are proactive in assessing their capability to withstand disruption from both an operational and a financial standpoint, and that they act decisively to mitigate actual or potential risks.
Cash Flows management
Cash flows management needs to be an integral element of a company’s overall COVID-19 risk assessment and action planning in the near term. In the short-term management needs to tackle questions in the following focus areas:
- Working capital management: Analysis of the company’s cash-to-conversion cycle, incl. payment terms, timing and frequency of key customers and suppliers, invoicing process to customers, management of accounts receivables and payables, inventory management, other cash preservation options.
- Forecasting process: Challenge key assumptions, identify quick mitigating actions and develop action plan for building a simulation with different scenarios to understand actual/potential needs in the short term.
- Liquidity management:
- Financing Strategy: Review of key terms, covenants and options for re-negotiating terms with banks and identify alternative sources of financing.
- Investment Strategy: Review of CAPEX program and key terms of financial instruments and options for early sale with optimal loss of income.
- Process and cost optimization: Identify quick wins and opportunities for immediate cost optimizations, revisit variable and fixed costs.
- Operation model optimizations: Analysis of options for workforce elasticity during times of changing demand. Tax and legal point of view supplementing the advice throughout.
- Tax compliance and planning: Review the current tax position and any optimization opportunities.
Supply Chain management
Many executives have important supply chain challenges to address in the coming months in order to ensure the survival and the recovery of their business.
- Working capital:
- Businesses impacted by lower demand may experience overstocking that could persist until production is reduced or demand picks up.
- Customers from affected countries likely to delay payments to preserve cash, whilst affected suppliers may be desperate to be paid for shipped/ordered goods.
- Non-impacted counterparties may offer early payment discounts or factoring opportunities.
- Affected operations: Assess the ability of affected suppliers to continue production and supply. Make contingency plans for alternative supply in the short and medium term.
- Engage with critical suppliers. Assess key trading terms and communicate regularly with critical suppliers to understand their ability to maintain and/or negotiate for continuity of supply.
- Alternative suppliers. Identify which of your key suppliers may be exposed to risk and consider scenarios for supply being partly/fully unavailable. Identify alternative suppliers.
- Customers: Frequent engagement with customers at an executive level is key to manage expectations.
- Relevant tax & legal aspects
Sectors most impacted by COVID-19
- Businesses dependent on tourism: hotels, some airlines, luxury goods traders and retailers.
- Manufacturers dependent on parts from affected countries, notably Automotive and Technology.
- Oil & Gas and Mining & Metals will see fall in both demand and commodity prices.
- Exporters who are significantly exposed to the international market.