Weathering the financial challenges of your business during – and after – times of crisis

The financial impact of the Covid-19 pandemic is just devastating. The 2008 banking crisis was mainly driven by a liquidity shock in the financial system. As a result, those corporations already in a shaky financial position were unable to raise more credit and eventually collapsed. The current situation is awfully different. Both supply and demand are compressed, and therefore revenues of many organisations are affected.

There are exceptions though. For example, Kawamoto Corp. is a Japanese company producing, amongst others, mouth masks. Its share price multiplied by 4 since the start of the catastrophe. Or you may have begun using Zoom for your teleconferences; its stock price doubled in just a year, pushing its market cap well above $30 billion. Nevertheless, most parties see a plunge in revenues, either driven by a fall in demand for their goods or services or due to interruptions in manufacturing and supply chains.

This makes that even economically healthy enterprises may currently be at risk of financial stress or, worst case, bankruptcy. We expect a severe worsening of companies’ profitability and, as a result, their solvency positions - debt covenants will be violated - together with a rapid drop in their liquidity positions. Credit rating agencies are downgrading corporate debt of blue chips like ExxonMobil, Ford, Boeing and Occidental Petroleum. In addition, yields are rising sharply, particularly for junk bonds. Therefore, policy makers worldwide are designing programmes to support businesses to avoid a total economic collapse in a post-Corona world.

But what can businesses do themselves to avoid or minimise financial hardship? There is no magic in corporate finance, so the first and most vital solutions boil down to safeguarding cash levels. These can all be classified under (optimising) cash flows linked to preserving cash from (1) operations, (2) investment activities or (3) raising financing.

Protecting cash from operations is often associated with cost cutting. This is self-evident, and many businesses are currently cutting their spending (thereby unfortunately hurting the top line of their suppliers) or placing employees on (temporary) unemployment. Canada-based Cirque du Soleil even decided to lay off 95% of its employees in one day and the American Hotel & Lodging Association projects 3.9 million job cuts in the US hotel industry alone. Furthermore, tenants like H&M, Inditex and C&A are refusing to pay their full rent.

But there is more that can be done.

1/ First, cash from operations starts from revenues: try to secure your core, and creatively look for new opportunities. Customers have massively switched to digital, and this is potentially a long-lasting change). So how might your business take advantage of this? In many firms, the current lockdown has accelerated digital transformation at an unparalleled pace.

2/ Second, working capital might be a source of funding. How could it be enhanced? Ensure that your remaining customers are invoiced swiftly and pay on time. It is essential now not to extend too much customer credit, not only for your own liquidity position but because the probability of your customers getting into financial distress is higher than ever. A win-win situation could arise if cash-rich customers are willing to pay immediately in exchange for appealing discounts. You might explore possibilities to convert your outstanding invoices to cash, for example through factoring or selling individual invoices. Brussels-based Ebedex, that offers an online marketplace where small and medium-sized firms can swiftly sell client invoices to investors, has seen a 25% increase in demand for its services since the Corona lockdown. Conversely, managing inventory levels and suppliers’ payment terms are more important than ever. The 2018 survey of The Hackett Group demonstrates that Europe’s top 1,000 nonfinancial enterprises could improve their cash conversion cycle significantly, releasing €1.1 trillion excess working capital.

3/ You should manage your cash flows from investment activities as well. You could either delay or delete planned CapEx, or alternatively sell some obsolete, less efficient or less strategic assets. Unfortunately, locating buyers for these assets at reasonable prices will not be straightforward nowadays. Similarly, many acquisition programmes are put on hold, and some transactions that were already announced are even being withdrawn by relying on Material Adverse Change (MAC) clauses.

4/ Finally, you should address your cash flows from financing activities.
Given the uncertain economic outlook, it is a sensible idea to re-assess your dividend policy. Conserving cash by cancelling (or delaying) dividends and share buy-back programs may be a wise decision. It’s probably the easiest source of funding, and it is not surprising that many corporations, quoted and unlisted ones, have announced dividend cuts.
Next, relations with banks should be carefully managed. Will your company be able to adhere to its bank covenants? If not, pro-actively renegotiate with your bankers. Raise financing when still possible, in the first place from banks by securing new credit facilities and fully drawing them, like recently announced by Ford, Boeing and Anheuser-Busch Inbev.
But you might even contemplate alternative sources of funding, like selling bonds or raising new equity. Global corporate bond issuance by investment-grade companies (like Walt Disney, PepsiCo or Nike) skyrocketed in March to levels of around $250 billion. There is also still willingness by asset managers to invest in stock at currently slashed prices, and billionaires like Carl Icahn, Warren Buffett or Carlos Slim all increased equity stakes in severely disturbed industries.

Below is an overview of the various options firms may need to consider:

In these situations, building financial plans - in particular cash budgets (with sensitivity analysis) - that need to be dynamically updated in this volatile world, may provide guidance on what actions are most advisable.

We all hope this pandemic will swiftly come to an end, and that we can - as soon and as well as possible - revert to the world as we knew it before. Let’s ensure that your business survives this unprecedented crisis. Therefore, approach your finances with open eyes and without any taboos. Now is the time to reflect on all alternatives, including those you would not typically consider for various secondary reasons.

Interested in more insights on how to cope with turbulent times?

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