Addressing the financial impacts of 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 China. Some automotive manufacturers have already had to suspend production due to lack of parts. Given the spread of COVID-19, a similar scenario can be expected in Europe as well – production interruptions, interference in the operation of catering establishments and shopping malls, a drop in tourism revenues, and the start of work from home.
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.
- Reforecast trading and cash flows. Test all assumptions and make sure they are correct. Ensure trading and cash flow forecasts are integrated. Model a downside scenario to understand potential risks.
- Review cash flow forecasts. Some businesses’ cash flows are already being devastated as revenue evaporates. Review in detail cash flows for the next 3 months, and identify what mitigating actions can be taken to preserve cash in the short/medium term.
- Review your lending documents. Understand the key terms, obligations, covenants and flexibility in your banking and finance contracts.
- Remain in contact with key stakeholders. Businesses should communicate regularly with key stakeholders including their lenders and investors in order to retain their confidence and support
In the event Covid-19 extends into medium term
- Seek out additional sources of capital early. 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, or tapping the equity markets.
- Keep plans and options actively under review. Sustainable financing is an iterative process.
Working capital and supply chain
- Working capital: Working capital management is likely to be challenging:
- 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.
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.
This piece has been originally developed by Deloitte Czech Republic.