The coronavirus outbreak has resulted in a major cash flow challenge for the small and mid-sized companies that have seen business dry up as normal economic activity comes to a standstill.
Many small businesses such as restaurants, bars, gyms and salons have been forced to shutter amid government-declared lockdowns while others have seen customer demand plummet as people isolate at home to avoid social contact.
The biggest immediate challenge for these companies is that the cash flow simply isn’t there, says Magnus Forsnes Krogstad, Head of Business Insight Norway at Nordea, who advises companies on cash management and liquidity issues.
“Liquidity is at the core when income disappears,” he adds.
Potential actions to boost liquidity:
- Utilise instalment-free periods from banks.
- Explore and use government support packages.
- Terminate consultant contracts.
- Review software licenses.
- Enter into a dialogue with your suppliers to negotiate extended payment terms.
- Communicate with your customers. See if they’re willing to pay ahead of schedule.
- Think about potential new income streams.
- Your account receivables could be a source of liquidity.
- Start a dialogue with your creditors as soon as possible.
- Look into alternative funding.
- Convert inventory to cash, if possible.
- Layoffs, with caution
Liquidity, liquidity, liquidity
Krogstad says the first step for companies facing a cash-flow strain is to get an accurate overview of their liquidity situation. How much liquidity do you have, where is it and in which currencies? With that in hand, companies should come up with a list of tangible actions they can take to improve their liquidity. See several potential actions to consider in the accompanying fact box.
With these options in mind, companies can then map out several different scenarios. For example:
- How long can we survive in the “as is” situation with our current liquidity position?
- How long will our cash position take us if we do actions (a) and (b)?
- How long will we survive if we do actions (a), (b) and (c)?
“The ideal scenario would give you a comfortable liquidity runway. It’s up to each company to decide how long that runway should be in this situation,” Krogstad says. He also cautions that most of these actions focus on cost-cutting, which also carries the hidden cost of making it more difficult to ramp up again when the crisis ends.
Also keep in mind that some of the usual parameters have likely changed in the current situation. For example, tax payments that have typically been highly prioritised may now have extended deadlines under some countries’ government support packages. So reassess what you do and don’t need to pay when and reprioritise accordingly.
See this overview from Nordea Research of some of the measures Nordic governments have already adopted to try to contain the economic fallout of the corona crisis.
Communicate, communicate, communicate
It’s crucial to open up the lines of communication with all relevant stakeholders as early as possible, says Krogstad.
Start a dialogue with your creditors as soon as possible. Explain your situation and see if they are willing to alter the terms of your obligation. Reach out to your bank to discuss instalment-free periods. Nordea, for example, has decided to offer six-month instalment-free periods to small and medium companies in need of help due to the coronavirus outbreak, as well as other credit facilities.
Also enter into a dialogue with your suppliers. They will likely benefit if you survive this period, Krogstad says, so it may be possible to negotiate extended payment terms.
Communicate with your existing customers and make sure they know you are still in business and able to deliver on their purchases, he advises. See if some customers may be willing to pay ahead of schedule. In addition, keep your staff continuously updated and involved in the situation. Be transparent with them and acknowledge their efforts.
Another component to liquidity, alongside cost cutting, is perhaps an obvious one: maximizing “cash in.” That’s where companies need to start getting creative and adapting to the current situation, says Joakim Bredahl, a cash management consultant also on Nordea’s Business Insight Norway team.
“If you can no longer engage with customers in person, then you have to go online. Now could be the time to launch your first digital distribution channel,” he says. Some hotels and restaurants, for example, have transitioned into online food delivery. Bredahl also cites the example of a hardware store that is now allowing customers to order online, drive to the store and have their purchase dropped off into their car trunk by an employee wearing gloves.
“The challenge is to rethink your business model in order to sell things from a distance, with minimal physical touchpoints during this period,” he says. That likely means e-commerce, social media campaigns and mobile payment solutions. As a bank, Nordea can help companies with setting up payment service on a website and connecting to mobile payment schemes.
Optimise your cash position
When it comes to liquidity, companies also need to ensure that the cash they do have is set up in the most optimal way, says Bredahl.
“You need to be aware of your currency exposure because the volatility is extreme in the FX market these days,” he says, citing the example of the Norwegian krone, which has seen historic falls. “Your liquidity could be hit quite hard if you owe a lot of money in a foreign currency,” he adds.
One possible solution is to use banks’ cash pool solutions, which allow companies to combine different currency accounts into one pool of liquidity, allowing them to borrow one currency against another currency account without doing the actual exchange. Then you can seek advice from your bank to see if your home currency is expected to recover or if this is “a new normal,” which translates to either hold off for a while or just make the trade. Beware, though, that the nature of a cash pool is to calculate your cash position based on all of your available liquidity, so do not stretch your currency exposure or you run the risk of ending up with a negative cash position.
Plan for when the crisis ends
If your liquidity position allows it, there are alternatives to layoffs. Consider whether your resources can be used in another way. For example, a hotel staff of skilled cleaners could be dispatched in these times when there is a high demand for labour to disinfect office spaces where COVID-19 infections have been found. Companies can also use this time to train and upskill their employees.
Don’t lose sight of the fact that the crisis will come to an end at some point, says Krogstad. Businesses that are able to ramp up quickly have the potential to steal market share from competitors that lag behind in the restart. Deep cost-cutting and massive layoffs will make the restart that much harder, so keep that in mind when cutting costs today.
In this related article, Nordea’s relationship managers across the Nordics share their insights about the biggest challenges small and mid-size businesses are facing due to the coronavirus outbreak.
And don’t miss this full overview of Nordea Research’s coronavirus-related research to stay on top of all the latest market developments, the policy responses from central banks and governments as well as the impact on the global economy and our own Nordic economies.
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