When the new coronavirus (COVID-19) struck, the world was shocked and at a loss. This highly contagious virus has plagued the world and paralyzed many major economies. This triggered a ripple effect resembling the global economic crisis. The media called it “a war against an invisible enemy”.
While frontline medical staff fight to contain the spread of the epidemic, an unstable market environment causes companies to seek help to overcome their difficulties. Meanwhile, business leaders around the world are dealing with unprecedented circumstances that threaten their way of doing business.
Enterprises are forced to stop production
At the early stages of the outbreak, the Chinese government implemented traffic blockades in many provinces and cities, in which both air and sea transportations were prohibited from entering and leaving many major ports. Manufacturers were ordered to produce medical equipment and the provision of necessities for fighting the epidemic. Other enterprises were ordered to halt any non-essential commercial activities. At the same time, people were ordered to stay at home and avoid social activities which led many companies – especially catering and tourism services – to record zero income since the epidemic was announced.
As of today, most companies have now opened their doors and returned to their normal practices. However, most companies are not expecting to recover the lost revenue from consumption and their income is far from covering fixed costs – such as wages and management expenses. Due to restrictions on the movement of goods at home and abroad, even basic service providers have been severely hit by the supply chain disruptions. Ultimately, very few can escape a cash flow shortage.
What can CFO do?
Taking the 2003 SARS epidemic and the H1N1 virus in the United States in 2009 as examples; history tells us that social unrest caused by epidemics is inevitable. Although many of these events are unforeseeable, the most important consideration is how companies will overcome their problems and restore their position in the market. By studying the companies that survived the recession, we realized that the key is that capable leaders can quickly adapt to changes in their business environment. This mainly depends on the CFO’s ability to react quickly and execute decisions in a timely manner.
Before the outbreak, one of the key focus of CFO was financial growth and return on investment (ROI). The better the usage of financial resources, the overall higher return on investment.
When faced with an epidemic such as this one, the first and foremost question asked by CFOs has become: “How long can we survive?”. To survive the crisis, the CFO plays a vital role in ensuring the stability and viability of the company. In the short term, the CFO must review the company’s current cash flow situation and develop a survival plan for the company for the next six months. A competent CFO might also be able to identify new opportunities during the crisis as well. The extent to which the CFO can contribute, however, depends on whether there is a timely financial statement, an effective accounting system, and an efficient financial team.
The followings are short and medium-term goals and steps CFOs should take into consideration to effectively manage through a crisis.
Short-term: Conduct a health check by reviewing current cash flow status
Goal: Optimize cash reserves
Requirements: Based on current demand (1 to 3 months) and the next 6 months, review and evaluate the company’s cash flow status.
Implementation steps:
- Determine available cash (liquid and semi-liquid).
- Determine the amount of money that can be borrowed from banks and funds that can be recovered from accounts receivable.
- Determine the amount of funds payable, and the amount of cash convertible based on existing inventory.
- Determine how much cash can be saved from operating expenses.
- Set the priority for cash outflows and payments; determine the applicability of government assistance plans and funds that can be raised from shareholders and investors.
- Review all legal commitments: if possible, consider renegotiating with the opposite party or terminate agreements that require cash investment.
Other:
- Formulate different scenarios: namely, worst case, normal case, and best case based on the current crisis situation.
- Make full use of existing human capital and organize experienced personnel from different departments to form a crisis management team to plan, recommend, assist and supervise the survival plan.
- Prepare a real-time “dashboard” to monitor the cash flow status and progression of the plan. Simplify the reporting and updating process.
- Establish effective communication channels and actively engage all stakeholders (employees, suppliers, investors). Leverage available technologies, such as email, social media, or any related digital communication channels.
Medium-term: Prepare a survival plan
Goal: Implement a survival plan and conduct forecasts
Requirements: Implementation and communication: Survival is a top priority, yet losses can be recovered at a later stage.
Implementation steps:
- Provide customers with corresponding discounts to pay-up-front and receive settle accounts in advance. Actively talk to suppliers about relief and delayed payment. By promoting the sale of excess inventory or inventory with short shelf life, the inventory is converted into cash.
- Consider selling excessive production equipment to increase cash flow.
- Reduce unnecessary operating expenses, especially those that need to be paid immediately.
- Give priority to necessary capital expenditures and actively communicate with creditors to avoid credit risk due to defaulting on payments.
- If the company’s balance sheet is strong, the company may request to postpone loan payments and reduce interest payments.
- Seek other financing methods – such as factoring and short-term financing – to increase cash flow.
- Review and reallocate capital commitments for high-yield projects. Review and consider stopping projects that are not feasible now or shortly after the crisis.
- Discuss how to fully benefit from the current government stimulus packages.
- Continue to communicate openly with stakeholders to promote trust, credibility, and loyalty.
Other:
- Review the company’s balance sheet – including fixed assets (whether purchased and leased assets), impairment of goodwill, inventory turnover, debt refinancing, accounts receivable and payables.
- Review the supply chain and implement new measures to improve efficiency and effectiveness.
- Review the company’s major investments and consider reducing expenditures; such as research and development (R&D), information technology (IT) and other capital expenditures.
- Consider alternative financing through crowdfunding and/or private lending.
Mid- to long-term: Explore new opportunities
Goal: Find opportunities emerging in the crisis
Requirements: Observe the market and discover new opportunities
Implementation steps:
- Review business and conduct SWOT analysis.
- Look for raw materials, plants, and equipment sold by domestic and foreign suppliers at discounted prices.
- Recruit outstanding talents to join your team.
- Pay attention to projects worth investing in or acquiring. Rapid business growth can be achieved through integration.
- Go global: this may be a great opportunity to enter overseas markets and disperse national risks.
- Review current operational capabilities and efficiency to improve profitability.
- Review and evaluate the company’s current risk control policy.
- Develop business continuity and contingency plans.
- Strengthen and expend the enterprise’s digital capabilities.
- Consider outsourcing the back-office and supporting functions to improve efficiency and overall effectiveness of the organization.
Other:
- Review the company’s business, products, and service scope for the possibility of restructuring.
Key Takeaways
In order to effectively manage through this crisis, enterprises should take a closer look at their business and allocate resources to what they perceive to be the “new normal” coming out of the crisis.
The CFO and other executives should adopt a transformative way of thinking after dealing with an epidemic such as COVID-19. To prepare for the new normal, companies need to formulate new budgets, establish “remote” key performance indicators for monitoring and management systems, revise risk management systems, and most importantly, develop business continuity and emergency plans.
Similarly, to achieve all of the above, companies should first be equipped with an efficient and effective information system. This is the first step towards digital readiness. If your business is still managing information and data manually, consider investing in the business’s digital capabilities as a risk management measure.
When facing an epidemic, it’s impossible to predict how long it will last. However, times have proven that the world will eventually recover and a new normal will emerge. We hope that business owners and financial professionals will be better prepared to face existential crises so they may survive and prosper for many more years to come.
