Over seven months into the outbreak of the coronavirus pandemic (COVID-19) throughout the world, there are clearly many unknowns as businesses seek a return to normality or, at the very least, economic stability. Such uncertainty may affect important business processes while the key priorities are liquidity and scenario planning, Below is a brief checklist for the CFO, CEO and senior management to consider in response to anticipated or actual financial difficulty.
Maintaining cash: Using intensive liquidity monitoring, 12-week cash flow forecasts is critical to identify the key stress points for businesses. It is also important to maximize cash flow and increase active management of collections. This is especially important for small businesses and middle-market companies, as they may not have easy access to credit facilities during this economic crisis.
Financial Modeling & Scenario Planning: Consider improving internal methodologies to allow business and financial modeling to be undertaken more quickly while stress testing interval models and sensitivity analyses to analyze key risks, triggers, flexibilities and strategies for effectively dealing with sustained periods of financial difficulty.
Reducing Expenditures: It is important to identify any non-critical business expenditure. In addition to reviewing long-term capital expenditure such as real estate or equipment, it may be important to create new controls on smaller expenditures to ensure that only business-critical items incur cost.
Inventory Levels: Another item to be considered is customer demand. The creation of shrinkage reports may also assist in identifying downward or upward trends and allow for better supply chain management. Consider identifying alternative avenues for supply and sale of inventory with a limited life-span.
Supply Chain Management: Engage actively with strategic suppliers and identify suppliers where disturbances will be most pronounced. Begin negotiations early to avoid precipitous value destruction.
Employee Engagement: It may be prudent to take advantage of government assistance programs or to rationalize workforces to improve business operations. Consider any recovery against the cost of rationalization. Retaining key talent is vital, and it may be possible to use variable and non-cash elements as incentives. The San Francisco Bay Area (and especially Silicon Valley) has been fortunate in having many of its tech industry employees able to work remotely. As a result, there may be longer-term opportunities to rationalize and reduce real estate operating costs.
Tax Strategy: There may be steps that can be taken to temporarily or permanently reduce tax outflows, whether by seeking deferrals from government authorities or modeling stimulus impact, or by considering the tax implications of wider internal reorganizations.
M&A: Existing business lines may not be viable in the long term, and an early M&A analysis and strategic implementation will avoid value destruction and maximize pricing. Some companies with strong enough balance sheets and liquidity may be in the position to play offense and acquire weaker companies at a favorable valuation during this economic crisis.
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