The coronavirus (COVID-19) outbreak has brought a considerable number of businesses to a grinding halt. As millions of people practice social distancing, companies are experiencing a dip in productivity or are predicting further constraints on cash and working capital, including potential liquidity challenges. This calls for important steps to be taken to bolster liquidity.
What should CFOs do now to ensure security, control and liquidity management?
The first priority for CFOs during the COVID 19 crisis is to focus and ensure that the company has enough cash and liquidity in the company reserves for the next 6 to 8 weeks. As the situation turns dire many companies have reported a 75% loss of profits in the first quarter of 2020.
As the world prepares for a possible global recession scenario, all incoming and outgoing cash flows are going to be put to test, with worst-case scenarios and, even the impact of foreign exchange on cash flow is affected.
The steps listed below are some highlights that can be considered by CFOS to bolster liquidity for the near future.
1. Focusing on present cash flow and liquidity requirements
Every company has its own cash and liquidity headroom. Identifying how much is available to you globally is the first step. In such a case, creating a model cash flow can help a CFO take a critical view of operations, review existing cash flows and understand how stressed scenarios might affect liquidity.
2. Running possible scenarios that ensure short-term cash flow
As there is no denying of the fact that market predictions will be severely affected, it is recommended for CFOs to create a possible multi-scenario plan for the future. This includes determining existing processes of the company that can quickly create short-term cash flows or creating new processes. Such as looking toward digital solutions that can generate revenue and at the same time, explore different what-if conditions such as not meeting payroll or a dip in operations services.
3. Adopting cost control measures
At a time when demand and supply will be at low, CFOs need to adopt new cost-cutting measures but at the same time be wary of not developing a strategy that might compromise the value and revenue-generating sources.
Constantly monitoring cost-effective initiatives like deploying digital products or solutions in place of existing ones can be fundamental to taking a closer look and riding the current crisis without incurring major damages.
4. Assessing supplier and customer payment terms
The next step in bolstering liquidity for your company is to reassess your relationship with your suppliers as well as customers. In times of slow economic growth, financial healthy across the pipeline is severely affected. Evaluate your credit terms and payment dates with suppliers before any payment defaults or delays take place. This agreement will put you in a good position when the economy is back on track. Whatever be the strategy it should be determined on favourable credit terms for the company and also keeping in mind the future of the company.
5. Leveraging financial waivers and tax subsidy
Many state and central governments have announced financial waivers and tax cuts in the wake of the crises. CFOs should determine which financial waivers they should opt for and take intelligent decisions for preserving cash. Additionally taking advantage of government policies and grants from small and medium businesses can act as a major relief to ensure business continuity.
In conclusion, CFOs at this time need to step up to manage liquidity and cash in the near future. Evaluating financial reporting requirements, creating contingency plans for both internal and external audit teams, determining dynamic discounting of payments and preparing financial models could be some of the ways to bolster company liquidity through the COVID — 19 crisis.
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