Downturn cash flow management: how to remain liquid.

7 key considerations for any business developing a strategic plan to manage cash flow in a market downturn.

Whilst governments across the globe have long been aware of the possibility of a worldwide pandemic and its potentially devastating human and economic cost, it is surprising how few businesses had considered the impact of a pandemic within their risk analysis let alone had a working pandemic continuity plan in place.  Indeed, although several government documents have been published to encourage and help business plan for a global pandemic, most businesses have been blindsided by COVID-19 and have had to develop and implement business strategies to deal with the situation on their feet. 

In some ways this lack of preparation is not surprising, no one in the developed west, which had mercifully escaped, MERS, SARS and Ebola, could foresee entire nations locked within their homes for weeks on end; shops, restaurants and businesses closed with no formal date given for them to reopen, tourism at a standstill, roads empty and many businesses in financial free-fall.

But the pandoras box has been opened and it is unlikely that the economic and business landscape post COVID-19 will ever be the same again.

However, whilst the cause of this economic change might be unprecedented, novel like the coronavirus which caused it, its effects on business are not. Most businesses have at some stage experienced a financial downturn; whether it was a loss of market share, a sector slow down or a full-on global recession. It therefore follows that most senior executives have all had to manage their businesses through significantly challenging times and develop and implement downturn cashflow management strategies to ensure the business will not only survive but be ready to bounce-back when the opportunity arises.  

Whilst we have all been shocked and saddened by the massive loss of life, for business the COVID-19 crisis must be approached as objectively as any other business challenge – with a clear understanding of any potential short, medium and long-term threats and opportunities and the development and implementation of strategies to mitigate and exploit them. 

Outlined below are some key considerations to ensure the financial stability of your business within any form of downturn:

1. Cashflow is king

In a volatile market being able to accurately forecast and manage your cash flow will be essential to your company’s financial survival. As L J Suzuki, Founder and Fractional CFO at CFO Share highlighted in a recent Forbes article

Money affects (and is affected by) every element of business; staffing, inventory, assets, vendor and customer relationships, and more. These all change in a downturn, so our thinking about money needs to change with it.   

This equates to a review and revision of existing strategies for every area of business from marketing to sales, operations and finance to reflect the current market conditions.  These revisions will be different for different businesses depending on both the impact of the crisis on their vertical and their available working capital. 

Within the COVID-19 if your business is unable to trade at present and for the foreseeable future, such as a hotel chain or aviation company, it makes sense to minimise costs in order to maintain liquid. However, if your business can adapt, and post COVID-19 might be looking at an entirely different business model, such as gyms or call centres, you may need to invest in research and development, infrastructure and marketing to move with the market. It is critical to build a downturn management plan to that meets the specific needs of your business taking all these variables into consideration.

2. Revisit your finance plan

Based on your analysis of how your business has, and will, continue to be affected by the current crisis, and the strategies you need to implement in order to mitigate their impact on your business, you are very likely going to have to adjust your existing financial plan.

This is not the time to move forward with no plan, and certainly not the time to belligerently follow a plan which clearly does not reflect the current marketplace and business challenges.

Indeed, in uncertain climates you may find yourself constantly adjusting forecasts and strategies to reflect the moving economic landscape. Ensuring you regularly generate and review a rolling forecast, and have the agility to adjust strategies based on these forecasts, will  ensure you have the right plan at the right time to minimise risk and optimise opportunity.

3. Own your payables strategy

If cashflow is tight, when are where you spend it is critical. Developing clear strategic guidelines such as eliminating early payments, prioritizing key suppliers, actively seeking and exploiting offers of extended payment terms / payment holidays can all help ease the pressure in the short-term.  

4. Optimise your receivables management

Unsurprisingly, in this uncertain climate there has been debate about the best, and most appropriate, route forward in terms of credit and collections – should it be put it on hold on the understanding that your customers might be struggling themselves or should it be business as usual? 

If your pockets are deep, crises such as COVID-19 provide an opportunity to cement your customer relationships by going that extra mile, offering extended payment terms and payment holidays. But, however deep your pockets, at some point you will be expecting monies owed to be paid and must weigh up the risk of deferring payments only to find your invoice at the bottom of the creditors queue at greater risk of default.

Rather than reducing your credit and collection activity, a downturn is the time for proactive and agile credit management. It is critical to communicate with your customers so you can understand their financial position and any potential risk for your business.  If you are thinking of offering extended payment terms, these must be based on sound financial understanding of what the business can afford with clear guidelines for the criteria to be met before they are offered to customers – this might include no previous payment defaults, the customer account being up to date bar most recent invoice or other key indicators.  In an ideal world you want to touch your customers before they have the opportunity to default and keep cash moving by ensuring your invoice has been received, reconciled and is on the payment run. This will take both time and resource – which needs to be built into your crisis planning.

5. Review financial support options

Most countries governments are offering businesses a range of financial stimulus packages to help them survive this crisis from tax relief, tax deferrals to financial grants or loan packages. These can provide a much-needed lifeline to a business which is struggling to remain afloat, but it is critical to consider the impact of any deferrals or loans on your long-term business strategy. To quote Suzuki “government stimulus loans are not a replacement for long-term business strategy” highlighting how businesses must focus on developing a business strategy that ensures the long-term financial security of your business not chasing free short-term cash fixes.

6. Identify and manage supply chain risk

Supply chain could be your own PPE crisis in the making, and in terms of getting people back to the workplace, might very well turn out to be your own personal PPE crisis – if its critical to your business and you can’t acquire it you have a problem. The key to successful supply chain management is planning. Liaise with your suppliers, understand their potentially different challenges and have a plan in place to deal with any potential issues. This could range from holding additional stock of key resources to splitting your business across different businesses in different parts of the globe – only by understanding potential issues can we be ready to address them.

7. Ensure your marketing plans reflect the market.

As you review and adjust your core business strategic and financial plans you will need to revisit your existing marketing plans and adapt accordingly. If business can pretty much resume as normal once lockdown measures lift, and you are confident on consumer demand, maintaining your customer relationships will be critical and you will need to continue to invest in marketing. Indeed, for some businesses the crisis will offer increased opportunity which may require investment in the promotion of new products or services or the development of new marketing plans to promote your existing services to a expanded customer base.

However, if your business is in full crisis, struggling to maintain liquidity, this might not be an option. Whatever your situation, maintaining the lines of communication with your customers, potentially through leveraging your existing digital and social media channels, sharing regular updates from the business or senior management which are appropriate, considerate and insightful might just keep you front of mind until times change.

Conclusion

It is impossible to see into the future and predict every potential crisis, but whilst we don’t know exactly what challenges await, we do have an understanding of their potential impact on our business and can therefore plan to mitigate them.

Through reviewing our historic challenges, both in market downturns and everyday business, we can understand and address our areas of weakness and ensure we have placed our business in the most robust position possible – whatever the world may throw at us.

There will always be the occasional curved ball, but with a robust crisis management framework in place, the business should be in a strong position to address any unforeseen issues swiftly and effectively and ensure the financial survival of the business in any economic climate.

Richard Brown

CRO of Debt Recovery and BPO provider 4D Contact, Richard has over 20 years of experience providing clients within strategic process solutions to mitigate challenging financial markets.