Confront epidemic: Eight financial countermeasures senior management should consider immediately
As the novel coronavirus epidemic continued to spread globally, the World Health Organization (WHO) emergency committee declared on Jan 30th, 2020 that the coronavirus outbreak was a public health emergency of international concern, thereby signifying that the battle to counter this outbreak had entered a critical stage. While the whole of China is united to fight the virus, the country has to contend with the significant economic costs of this outbreak, in addition to its impact on people's daily lives and public health. From a macro perspective, market demand and production dropped significantly, impacting investments, consumption, and exports. Among the industries affected, consumption-related sectors (such as tourism, catering, retail, entertainment, transportation and logistics and education) have been the biggest hit. Companies in these industries, especially small and medium enterprises, are facing a myriad of challenges and negative impacts, such as significant decline in revenues, fixed costs (such as labor, rental expense, etc.) accounting for a greater proportion of total operating costs. Each of these effects could lead to a rapid deterioration in an enterprise's financial condition, increasing the risk of a liquidity crunch or even collapse of an otherwise healthy company.
To weather this crisis and mitigate potential adverse consequences and uncertainties brought on by the outbreak, senior management should swiftly adopt countermeasures and take immediate action to protect and safeguard their own business operations. Based on the practical experience we have gained from assisting numerous enterprises in dealing with and responding to systematic or structural financial crises and other significant emergent incidents, we recommend senior management to consider the following eight measures as a matter of priority:
1. Continuously monitor and assess financial impacts arising from the epidemic
Unlike in normal business cycles, enterprises this time could face drastic declines in sales orders, shortages of supplies of raw materials, a liquidity crunch, and other extreme situations within a very short timeframe during the epidemic. Senior management should adopt measures to track, inspect, and assess the impact of the virus outbreak on a daily basis, stay vigilant for signs of financial distress, establish a monitoring mechanism and prepare a 100-day cash flow forecast, in order to evaluate in advance the potential impact of a cash shortfall and prompt management to adopt appropriate measures in a timely manner.
2. Enhance working capital management in special situations
In the hypothetical scenario where the epidemic were to create negative financial impacts for longer than three months, five months, or even longer, maintaining liquidity and ample cash reserves would be the biggest challenge faced by affected enterprises. Companies should formulate working capital management measures based on their actual cash flow situation. During the crisis, enterprises should pay special attention to accounts receivable management, and communicate with partners upstream and downstream for the purposes of shortening the collection period and minimizing accounts receivable balances on the one hand, and extending the payment period on the other hand in order to improve their overall liquidity position.
3. Enhance cost control and discipline over investment expenditure, minimize cash outflow
In the midst of the crisis, revenue and profitability will inevitably be affected. In such circumstances, companies should consider adopting prudent cost control measures based on the nature of their business nature and the state of their sales order book. Companies should also, subject to compliance with relevant laws and policies, try to reduce fixed costs, control variable costs, and carefully assess and control capital expenditure in order to maintain cash flows during the outbreak while also retaining their core competitiveness.
4. Take advantage of introduction of relevant state and municipal preferential policies
Since the Covid-19 outbreak, the central and local governments have promulgated a series of preferential policies to control the epidemic and support companies. Five of China's state banks (including People's Bank of China) on 1 February 2020 introduced 30 measures to help individuals and enterprises to cope with the effects of the outbreak. Moreover, the State Administration of Taxation is formulating specific preferential policies in view of the epidemic. Many local governments, including those in Beijing, Shanghai, Guangdong, Sichuan, Hainan, Chongqing and Suzhou, have introduced preferential policies to ease the burden of enterprises. Such policies include tax deductions or deferred payments, rental reduction and deferred payments of social security. More preferential policies are expected to be introduced by other local governments. Enterprises should review the new policies and consider how best to utilize them to minimize the financial impacts of the outbreak.
5. Maintain positive communications and relationship with financial institutions
China Banking and Insurance Regulatory Commission and some local governments have introduced preferential policies and measures to provide financial support to enterprises, especially for small businesses in areas and industries affected by the outbreak. For instance, financial institutions are required by the government not to withdraw or terminate loans to affected enterprises without reasonable grounds. Furthermore, financial institutions may extend the repayment terms for enterprises experiencing difficulties in making outstanding payments as a result of the outbreak. Financial institutions may also lower loan interest rates, raise credit lines and offer mid- to long-term loans, in order to support relevant enterprises in overcoming the impact of the outbreak. Meanwhile, China Securities Regulatory Commission has also promulgated a policy to support enterprises in refinancing their maturing bonds during this period. Companies should communicate with banks and other financial institutions following the new guidelines and seek preferred financing terms to ease the pressure on cash flow from loan interest and principal payments.
6. Probe for alternative financing channels to cope with short-term cash shortfall
In the face of a serious liquidity crunch, a company should also consider new channels to obtain short-term financing in order to ease pressure stemming from a temporary shortage of funds, which could be critical to a company's survival. Meanwhile, long-term financing options, such as an equity offering, should also be considered in planning for the repayment of loans and enhancing corporate liquidity and capital strength.
7. Dispose non-core assets or underperforming businesses
Not only can a company reduce potential losses during these challenging times through the identification and sale of underperforming businesses and/or non-core assets, but it can also realise capital which management can better utilise through redeployment to maintain and support core operations.
8. Embrace challenges and take this opportunity to undertake restructuring
If a company fails to self-rescue by taking any of the individual measures mentioned above, senior management may consider implementing a combination of the measures in undertaking a holistic corporate and/or financial restructuring which could include improving the working capital position, achieving cost savings, disposing of non-core assets, debt restructuring, gaining new investors etc. A holistic restructuring could also improve efficiency of the business by creating a leaner corporate structure and a more cost-effective business model with healthier financial leverage. This could enable the company to emerge from a turnaround situation healthier and stronger.
A crisis not only presents serious challenges but can also present opportunity. While it is inevitable that the Covid-19 outbreak will impact negatively on certain industries and corporations, enterprises which can overcome this crisis through the adoption of appropriate measures may be able to strengthen its "immune system" so as to be better able to withstand financial distress and structural risks. This would enable an enterprise to establish a more healthy financial and corporate structure, improve its competitiveness, and progress to a higher level.
For more information on the financial measures during special situations and crisis management, or any other issues that are of your interests, please contact Deloitte China Restructuring and Forensic Group at RFG@deloitte.com.hk