Responding to the immediate challenge
11. Audit payables and receivables transactions
Make sure you’re paying the right amount for the goods and services you procure and collecting the right amount for goods and services you sell. On the payables side, double-check that you’re not overpaying duties and taxes on purchases, especially as alternate international supply locations are used to keep supply chains running.
Also, if you have the cash flow to support it, make sure you’re taking full advantage of all available discounts. On the receivables side, look for situations where unearned discounts were applied and then aggressively pursue the proper payment.
Once the audits have been completed, look for longer-term policy and process improvements that can prevent new problems from cropping up. Consider using robotic process automation for your audits, which will reduce the burden on headcount.
12. Understand your business interruption insurance
Companies should understand existing business insurance policies and the coverage they have in the event of a significant business disruption. Such insurance generally covers losses arising from disruptions to a business’s customers or suppliers. However, the breadth of coverage can vary significantly by insurer policy, industry sector, and geography.
In addition, due to the insurance losses from the SARS epidemic, some insurers have included specific exclusions for losses arising from epidemics and pandemics, which you’ll need to understand if this is the case in your policy.
13. Consider alternate or non-traditional revenue streams
If your scenario planning is showing pressure on your continued revenue streams, consider ways you could temporarily or maybe even permanently replace that revenue.
For example, if your primary markets are international, how might you pivot to domestic markets (especially if your inventory is perishable)? If you have assets you use to generate revenue, how could you think differently about how those assets are used to generate alternate revenue sources?
Not only could this reduce some of your top line pressures, it could also mean not having to reduce your cost lines as significantly (not to mention a potentially more diversified revenue mix in the longer term).
14. Convert fixed to variable costs, where possible
In times of uncertainty, it’s generally a good idea to swap fixed costs for variable costs wherever you can–preserving your core business while increasing your flexibility on the fringes.
Selling assets and then leasing them back is one way to raise emergency cash. You might also want to consider expanding your use of practices such as contract manufacturing, transportation fleet leasing, and third-party warehousing.
This is not likely a quick-hit measure for most companies, but may be important to longer-term cash flow management, depending on how long demand and supply chains are disrupted by COVID-19.
15. Think beyond your four walls
To maximize working capital, you can’t only focus on your own operations and inventory levels: you need to think about your entire ecosystem and supply chain. Squeezing inventory out of your operation may not do much good– and could in fact introduce significant risk–if it just shifts the burden to a supplier or customer.
The same is true for payables and receivables. It’s important to carefully consider the upstream and downstream impact of your actions. High-level financial risk assessments should be conducted on any critical, sole-source suppliers to identify issues before they become problems.
In extreme cases, if a critical supplier is at risk, you might even need to buy a stake in the company or acquire the business outright to protect your supply chain and keep your goods and services flowing.
What’s next: Recovering and returning to normal business operations
Cash flow management needs to be an integral element of a company’s overall COVID-19 risk assessment and action planning in the near term.
Even for companies that have not yet been adversely affected, we recommend management teams with concerns about COVID-19 actively evaluate their cash flow requirements, develop appropriate actions under various scenarios, and assess potential risks in and to their customer base and supplier network.
Written by: Deloitte
Read PART 1 here: COVID-19: Managing cash flow during a period of crisis [PART 1]