COVID-19: Managing cash flow during a period of crisis

Since COVID-19 was first identified in Wuhan, China in late December 2019, the virus has spread to more than 75 countries, impacting communities, ecosystems, and supply chains far beyond China.

The supply chain disruptions identified in our previous report COVID-19: Managing supply chain risk and disruption may also have serious cash-flow implications for organizations. This paper, produced by Deloitte Canada, focuses on these cash-flow challenges and lays out measures organizations can take to mitigate the damage caused by this unpredictable event.

Who will be hit hardest?

The business disruption caused by the coronavirus in China is a strong indication of what the rest of the world might expect. A survey jointly conducted by Tsinghua University and Peking University estimates that 85 percent of small and medium-sized enterprises (SMEs) in China will run out of cash within three months, and two-thirds will run out of money in two months if the crisis does not abate. The People’s Bank of China, as well as city and provincial governments, have announced measures to help keep SMEs afloat.

Beyond China, several classes of business are particularly vulnerable to cash-flow problems stemming from the outbreak. These include business that are already struggling with profitability, especially those with low cash reserves; organizations in sectors such as tourism, hospitality, entertainment and air transportation; as well as businesses in consumer goods and retail, including those with high exposure to China, such as seasonal apparel companies. Even commodities-based industries such as mining or oil and gas could be hit by fluctuations in demand and pricing.

Strategies for responding to the immediate challenge

Companies may consider developing a treasury plan for cash management as part of their overall business risk and continuity plans. In doing so, it is important to take a full ecosystem and end-to-end supply chain perspective, as the approaches you take to manage cash will have implications for not only your business but also your customers.

Based on lessons learned from the SARS outbreak in 2003, the 2008 recession and credit crunch, and the Japanese tsunami of 2011, these are cash-flow management strategies for consideration:

1. Ensure you have a robust framework for managing supply chain risk
2. Ensure your own financing remains viable
3. Focus on the cash-to-cash conversion cycle
4. Think like a CFO, across the organization
5. Revisit your variable costs
6. Revisit capital investment plans
7. Focus on inventory management
8. Extend payables, intelligently
9. Manage and expedite receivables
10. Consider alternate supply chain financing options
11. Audit transactions for payables and receivables
12. Understand your business interruption insurance
13. Consider alternate or non-traditional revenue streams
14. Convert fixed to variable costs where possible
15. Think beyond your four walls

Detailed discussion of these 15 measures can be found in the downloadable report.

Recovering and returning to normal business operations

Cash-flow management needs to be an integral element of a company’s overall COVID-19 risk assessment and action planning in the near term. Even for companies yet to be adversely affected, management teams with concerns about COVID-19 may consider actively evaluating their cash-flow requirements, developing appropriate actions under various scenarios, and assessing potential risks in and to their customer base and supplier network.