Coronavirus: How to manage cash flow and working capital

Coronavirus: How to manage cash flow and working capital

With the Coronavirus (COVID-19) outbreak declared a ‘global pandemic’ and no apparent end in sight, we reveal what founders of entrepreneurial technology businesses are doing to safeguard their cash flow, working capital and ultimately their company.

Estimated reading time 6:00 minutes

Understandably, leaders of entrepreneurial technology businesses are extremely concerned about the impact Coronavirus will have on cash flow and working capital.

The complexion of the trading environment has changed during the past eight weeks, and the inevitable delays and disruption to supply chains caused by the spread of the virus have created unforeseen and unprecedented pressure on cash flows and working capital.

Firms have responded immediately to protect employees, understand the risks to their business, and manage supply chain issues caused by the government response to prevent the proliferation of COVID-19.

There are several categories of companies that are particularly exposed

  • The first category is those companies providing goods and services in sectors that have been directly interrupted by the virus such as travel, hospitality and retail.
  • A second category of businesses particularly exposed to the effects of the virus is those companies with large customers operating in the sectors most affected. These second category businesses can be in many sectors, such as software, professional services, maintenance.
  • A third category (which includes most other companies) provide goods and services to companies in the second category.

There is a waterfall and lag effect as the business mitigation actions from the first category of businesses impact the second; the second category reacts to implementing a set of mitigation actions which then affects the third. Simultaneously, those companies in the second and third categories are trying to pre-empt the impact they perceive to be coming down the line.

Companies with unstable cash flows or loose working capital management strategies before the outbreak are particularly exposed to the economic impact of the virus. As we saw in the financial crisis of 2008/9, many marginal businesses will fail early.

What practical steps are business leaders taking to safeguard cash flow?

  1. Recognising the importance of cash flow and quickly developing a plan for cash and working capital management.
  2. Considering the supply chain in its entirety and forecasting carefully over the short and medium-term to ensure a robust framework is implemented to manage supply chain risk.
  3. Establishing a dialogue with current and new lenders, and existing investors to ensure that the company’s sources of finance remain viable and appropriate given the prevailing conditions.
  4. Reviewing resource and headcount requirements, evaluating whether furloughing, redundancies, salary cuts or deferments are appropriate.
  5. Developing a CFO mindset across the organisation, analysing and evaluating cost structures:
    • Objectively prioritising discretionary (variable costs which firms have a higher degree of control over) and non-discretionary costs (fixed costs that firms do not have as much control over).
    • Optimising working capital by deferring payments to creditors for costs that do not have an immediate cash inflow impact.
    • Closely monitoring and chasing debtors.
  6. Seriously reviewing capital expenditure as well as current and future investment plans by deferring, postponing or cancelling investments.
  7. Considering alternative financing options with suppliers that are acceptable and appropriate to both parties, such as deferred payment, extended contract periods and postponement of contractual obligations. 
  8. Taking time to understand the latest business support policies, such as the UK’s temporary Coronavirus Business Interruption Loan Scheme (CBILS) which aims to support SMEs with access to loans, overdrafts, invoice finance and asset finance of up to £5 million and for up to six years.

Responding to the challenge; the Isosceles way

At Isosceles, we work with our clients as a dependable strategic partner. During times like this, we navigate our clients through these tough conditions in the following ways:

  • We have conducted risk assessments to determine the impact on cash as well as product and service delivery.
  • We are testing how our clients’ contingency measures are designed to deal with the direct and indirect impact of the outbreak. 
  • We are providing detailed examinations of debtors and creditors.
  • We are deploying ‘what if?’ modelling to assess the response of the business to hypothetical scenarios. For example, “what if new sales drop significantly?”, “what if some customers can only pay 50% of the invoices?”, “what if cash reserves begin to run dry?”, “what if 50% of staff are on sick leave?”, “what if the founder needs to fundraise at a time like this?”.

From interpreting government initiatives and ensuring people can work from home safely, to negotiating with suppliers, customers and funders and working with the management team, times like this call for a strategic business partner, like Isosceles, to provide support and interpretation in financial and HR matters. Never has it been so important to offer fully integrated financial and HR support.