Evident from the events of the last few months, the COVID-19 pandemic is first and foremost a human tragedy affecting the lives of millions of people across the globe. However, it is also raising a significant question on the ability to be a going-concern for many businesses in India and worldwide. Many businesses, especially small and medium-size businesses now face months or even years of uncertain and unfavorable trading conditions before things can get back to normalcy. The reduced demand and supply chain issues have a considerable effect on the liquidity of businesses.
Here are 10 strategies to manage the financial health of your business that can help you get through these tough times and in placing your business for the future:
1. Cash Flow budgeting
The saying that CASH IS KING is more relevant than ever before. Cash depicts the ultimate truth about a business and its performance. Businesses need to put more emphasis on cash now and not on income statement metrics. Cash has to be monitored daily and a robust 12 months cash flow budget has to be prepared and tracked. You can see how your company is doing at turning receivables into cash. You can spot early warning signs of distress, and you will know how to manage so that cash flow is healthy.
2. Focus on cash management to improve liquidity
This is a time when everyone in the organization has to think like a CFO since most decisions they make will have an impact on the cash position of the company. Focus on the cash conversion cycle. Cash should be preserved and used judiciously. When businesses are tracking and preserving cash on a daily basis they watch each expense carefully and do not indulge in any unwanted expenses. It is also better to provide incentives and rewards to your team when cash collection is made and not when a sale is made. Explore and make use of all government schemes / grants that are available for your business.
3. Receivables & Payables management
Grab the opportunity to maximize cash inflow by offering discounts to customers for clearing outstanding payments quickly. You may also want to focus on your customers with large outstanding balances first. Engage with customers on a proactive basis to ensure that there are no disputes which will cause delayed payments. Consider financing solutions like factoring, which is a type of debtor finance in which a business sells its accounts receivable to a third party at a discount to meet its present and immediate cash needs.
Businesses need to map their critical suppliers to decide payment priorities. Explore possibilities for supply chain financing, which is a solution that can be initiated by us in order to help our suppliers to finance their receivables more easily and at a lower interest rate. Ensure you pay your vendors on the due date or just before the due date, rather than making payments too early, which will help in better cash management. Payments can be made early if good discounts are offered by the supplier.
4. Identifying non-profitable or low profitable products/services and customers
COVID-19 crisis has led to a scarcity of resources and this calls for knowing the exact profitability of individual customers and products/services. Investment should be directed towards profitable products/services and customers. Non-profitable products/services will be required to be scrutinized and analyzed and the right action after this analysis can be reducing costs, increasing the price, changing or enhancing some product/service quality, or discontinuing the product/service altogether. Cost components of a product / service has to be scrutinized to see whether there are any options to save cost.
5. Inventory Management
Minimize order quantity and resort in just-in-time (JIT) inventory policies as far as practical. You should also take steps to dispose off slow-moving and obsolete stock by offering discounts. Work-in-progress has to be kept at an optimum level by streamlining the production process.
6. Restructure loans
Highly financially leveraged companies (that is companies with high debt) may find it hard during these times to pay monthly interest and premiums. Such companies should approach their bank for an option to restructure their debt/loan or explore loan take over options by other banks who may offer better terms. This will in turn reduce the burden and monthly outflow comes down considerably. Note that interest will keep accumulating even if you take advantage of the moratorium on loans declared by the government and hence it might be better to continue paying the EMIs if sufficient cash reserve is available.
7. Reduce the burn rate where possible
Fixed expenses should be converted to variable expenses if possible. Variable expenses occur in proportion to production or sales activities, unlike fixed expenses which are to be met every month without fail irrespective of any production or sales activity. Operating expenses should also be scrutinized and unnecessary and discretionary expenses should be avoided. An example of this is, most of the SME companies are working remotely during this crisis, which provides an opportunity to negotiate on the office rent to be paid monthly. Also automation of routine processes to save cost could be considered.
8. Identify areas of growth
It is evident that even in times of extreme uncertainty like this, there will be areas of growth for more businesses – online? select customer segments? select geographical areas? The management team has to work with the sales & marketing departments to come up with urgent but sustainable solutions for growth in the short term. There could be opportunities to tap into the online sales channels.
There will also be Merger and acquisition opportunities with lower pricing and these opportunities can be tapped by a business having the operating and financial ability and flexibility to make decisions faster. We have seen effective M&A transactions in the past where they showcased huge potential to generate good returns once the crisis was over.
9. Raise equity
When the going gets tough, funding in the form of equity is one of the best options. Repaying loans and interests can be very challenging at the time of a crisis. Generating interest from angel investors / private equity investors who believe in the long term potential of the business can be explored at this stage. The equity so generated can be used to repay the loans fully or partially which will ease some of the burdens. Many businesses which were incurring capital expenditure to expand business or for new projects will have to assess the feasibility in a post corona world and also consider alternate means of financing to complete the projects.
10. Karma and compassion
Have open conversations with employees and other stakeholders and be compassionate towards them. Ensure that well-performing employees are motivated and encouraged.
Another fact is almost all business owners are facing the same kind of issues as you are due to the Corona pandemic. At some point, many of these businesses will want an act of compassion that goes beyond the written / verbal contractual terms agreed upon. Be willing to lend a helping hand and offer that support whenever you can, and you will be surprised to get that from someone else in return. What goes around, comes around.
The author is a partner at JAKS & Associates and can be reached at 8281019444 / [email protected]