As the world reacts to coronavirus’s pandemic status with travel bans, event cancellations and ceasing business operations, companies may want to start reassessing their 13-week cash-flow model. A lot has changed in just two weeks, and the assumptions from a fortnight ago no longer apply.
To endure this difficult time and emerge poised to capitalize on the rebound, businesses will need a strong understanding of the factors affecting their cash-flow projection for the next 13 weeks.
Critical areas of focus
Most if not all industries will be affected in the coming months. Some will be hit harder than others: transportation, retail, entertainment, hospitality, construction and manufacturing.
As you assess your 13-week cash flow, make sure you form assumptions based on your respective industry and through careful analysis of the following variables:
Customer demand for products and services can change drastically within the next few months, spiking in some markets and waning in others. Ask these questions to figure out how disruptions to customer relationships may affect cash flow:
- What will happen to your customer demand as a result of the escalating situation? Will you experience less inbound business and increased turnover?
- Will supply chain disruptions influence timely service delivery to customers?
- Will your customers delay payment as a result of their own internal challenges, negatively affecting accounts receivable?
- Will you have the option of slowing down payables to compensate for slowing receivables?
- Will you have live touchpoints with your important customers? (Companies that reach out empathetically may have a better chance of being first on the list as AR slows.)
- How will all of these factors influence your covenants? Proactive conversations with lenders go a long way.
- Are you doing anything to make sure churning customers will return when the dust settles?
COVID-19’s impact on human capital cannot be overstated. Businesses need to account for the costs of sustaining a workforce in the event of sloping demand and potentially rising paid leave. Some of the main personnel factors that will influence cash flow include:
- Reduction in worker hours as a result of people focusing on their health and the health of their families.
- Increases in PTO costs, especially when compounded by a reduction in output.
- Retention considerations and potential layoffs during a work stoppage or slowdown.
- Additional costs for protective equipment and hygiene services that employees need to continue working safely, particularly in healthcare, food retail and other sectors that will remain largely operational.
Nearly 75% of U.S. companies have experienced supply chain disruptions as a result of coronavirus. These and other operational circumstances must be factored into 13-week cash-flow analysis:
- Travel restrictions.
- Whether or not to renew vendor contracts.
- Planning for demand and, in turn, procurement and workforce resources.
- Preparations, including sales and marketing campaigns and lead-time projections for a higher velocity of business once the slowdown ends and pent-up demand hits.
Capital and liquidity
Managing capital and understanding options for liquidity are critical in uncertain times. Make sure you have answers for these questions as you forecast for the next 13 weeks:
- What reserves do you have available (e.g., cash and lines of credit)?
- Should you draw your line of credit now or wait until you need the money?
- How will revenue pressures affect contribution dollars to absorb fixed costs; will cost rationalization be required?
- In the very possible scenario that you default on loans or violate loan covenants, do you understand the levers that exist to manage the situation?
Key recommendations going forward
1. Communicate proficiently
Working with vendors and clients to extend payment terms can be hugely helpful in sensitizing your 13-week cash-flow analysis to AR and AP. Similarly, collaborating with lenders may help you get better availability on asset-based loans through better terms on the borrowing base.
2. Closely monitor cash flow
Businesses with lower levels of liquidity, especially, should task someone with managing the details of 13-week cash-flow analysis and reporting to senior management on a real-time basis. This will improve flexibility and enable more nimble business responses.
3. Don’t focus on past assumptions
Don’t spend too much time re-analyzing or chasing explanations about bad assumptions from previous periods. Focus on improving the go-forward assumptions and details as a better use of management’s time. Also, we recommend preparing 13-week cash flows for multiple scenarios.
4. Remember there may be a light at the end of the tunnel
That light may or may not be within sight of your 13-week cash-flow analysis, but the slowdown will eventually come to an end, and pent-up markets will accelerate business. If possible, use this downtime to prepare thoughtful marketing and sales campaigns that can help you capitalize on the rebound.