Three months into the outbreak of the Coronavirus (COVID-19) in the United Kingdom, 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 supply chain maintenance. Below we provide a brief checklist for the CFO and senior management to consider in response to anticipated or actual financial difficulty.
Maintaining cash – Using liquidity monitoring, 13-week cashflow forecasts and an early analysis of bank covenant base case models is critical to identify the key stress points for businesses. It is also important to maximise cash inflows and increase active management of collections. Having cash management sweeps will reduce cash inefficiency.
Modelling – Consider improving internal methodologies to allow business and cash modelling to be undertaken more quickly while stress testing interval models and sensitivity analyses.
Reducing expenditure – It is important to identify any non-critical business expenditure. In addition to reviewing long-term capital expenditure such as real estate, it may be important to create new controls on smaller expenditures to ensure that only business-critical items incur cost.
Adjustment of inventory – Another item to be modelled is 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 disruption will be most pronounced. Begin negotiations early to avoid precipitous value destruction.
Employee engagement – It may be prudent to take advantage of government schemes or to rationalise workforces. Consider any recovery against the cost of rationalisation, including any pension-related liabilities. Conversely, retaining key talent is vital, and it may be possible to use variable and non-cash elements as incentives.
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 modelling stimulus impact, or by considering the tax implications of wider internal reorganisations.
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 maximise pricing.
Directors’ duties – Where there is a real risk of insolvency (e.g., when liabilities exceed assets), directors should carefully consider their duties to creditors. Consider other regulatory and legislative change, e.g., cybersecurity, as working practices change.
Documentation scrub – It may be helpful to liaise with external counsel to undertake a fresh review of financing and other documentation to analyse key risks, triggers, flexibilities and strategies for effectively dealing with sustained periods of financial difficulty.