Deloitte: Managing business cash flow in a crisis

In a recent survey of businesses operating in Malaysia, it was stated that managing cash flow is currently one of the top 3 priorities.

Many businesses have to brace for a long period of difficult trading business environment, lost sales that translates into permanent instead of a timing difference, and a sudden and unanticipated pressure on liquidity. COVID-19 has forced many businesses to re-evaluate their cash flow management. One such measure businesses can implement is the 13-week Short Term Cash Flow Forecast (STCFF), to help managers prioritise cash needs in daily business operations.

For a business to be on the road to recovery, management should continuously evaluate short-term liquidity demand, place importance on critical business expense, and pinpoint internal cash sources (such as working capital management).

Working capital optimisation

Working capital can remain trapped and this remains a key risk for many businesses which may translate into liquidity stress. With decreasing demand, inventories will build up and be difficult to clear. Customers experiencing a similar situation will also find it challenging to make timely payment. This in turn causes an increase in receivables, which will result in delayed payment to suppliers.

Businesses may adopt these measures to enable a more effective and efficient cash flow:

• Receivables – Early and proactive talks with customers, reduced terms for discounts, and discourage debtor financing.
• Payables – Stop early payments, focus on critical suppliers, and review existing terms and supply chain financing.
• Inventory – Reduce orders and back-up stocks, implement consignment approach, provide discounts on slow moving and obsolescent stock, and resolve production bottlenecks to trim work-in-progress (WIP).
   

Cost base realignment

Businesses with high fix and inflexible cost structures are the most vulnerable to significant decline in earnings. Business computing their H1-2020 financial result may have to endure a significant performance gap against their FY20 plan.

Some cost optimisation strategies can be implemented to ensure cost savings translates to the bottom line to improve financial health and enterprise value.

An effective cost reduction programme consists the following:

• top management’s commitment to a bold yet realistic transformation programme with buy-ins from board of directors;
• driving execution to create value;
• through a repetitive process, emphasis on agility and flexibility that deliver quick wins.
   

Credit and funding

Many borrowers and lenders are caught by surprise by the size and urgency of funding required. Some companies may be able to drawdown on existing revolving credit facilities, while others may need to request for covenant waivers from lenders or increase their loan limit. Businesses are advised to consider alternative lenders and special situation funds.

Existing measures business can consider:

1. Early discussion with lenders
2. Revisit the forecast to identify potential cash shortfall and amount, and timeline required for funding
3. Managing working capital and implement cost control measures
4. Recognise un-pledged collateral that could support new funding request
5. Appraise existing facilities or inter-creditor arrangements and seek concurrence
6. Request committed but undrawn lines to provide additional liquidity
7. Informal or formal restructuring scheme

During these unprecedented times, it is crucial to be proactive, adaptable, and to act quickly with substantial cash preservation action to cover any cash shortfall. Businesses can ride out this storm by positioning themselves to take advantage of the recovery period.

The views and opinions expressed are those of Khoo Siew Kiat, Deloitte Malaysia Restructuring Services Executive Director, and do not necessarily reflect Deloitte’s view.