What are the key concerns of CEOs or CFOs in times of uncertainty: What operational changes would prevent losses? How to maintain a work force without layoffs? How long the pandemic and its aftermath will last?
“While most of us prefer working with a full set of information, this will not be available - you need to act now!” says Stephen Gugu, advisor at the Private Financing Advisory Network (PFAN) and Managing Principal at InVhestia Africa.
Gugu suggests that to improve liquidity in general companies should pay attention to the following questions in the first place:
- How much cash do you have?
- What is your cash outflow per month on average? (Burn rate)
- How long could you operate at your current burn rate with the cash you have on hand before you would have to cease operations? (Runway)
- What runway do you want to achieve?
- What actions should you take to achieve this runway?
While the first four questions may seem easy, as most of the answers are within the control of a company, the fifth is a tricky one. The follow-up questions and clarifications would help find a solution:
- What are your key revenue lines, how will they be affected, and what actions can you take to improve each line? “This may mean a strategic shift in what you do day to day, much like the luxury perfume manufacturers that have pivoted to produce hand sanitizer. We suggest that thinking about your ‘edges’ and how to achieve them is good place to start,” explains Gugu.
- If you sell, can you collect, and can you be paid on time? It is important to consider when you will be paid if you extend credit.
- Looking at your costs, which are the key ones? What must you pay today? Are there areas where you can negotiate for a write off? Some items, for example, staff costs, may not be as flexible, but you could negotiate your rent with your landlord.
- What is your debtors’ position? Who can pay now? Who cannot, and would they be able to pay if you gave them a discount? It is important to remember that your debtors are currently taking the same tough decisions as you are.
- Who do you owe money? Who must be paid today and who can wait? You need to ensure that your credit rating remains positive. It is crucial to communicate this clearly, especially with those you expect to wait.
A financial model is the best tool to work through these questions. It is critical to create different scenarios, use them for negotiation and planning, and then pick one and stick to it, rather than “fall into the trap of analysis paralysis”.
However, if the organization has debt, the above questions alone will not suffice – there is a need to consider how to service the debt even while addressing liquidity concerns at the operational level.
Under conditions of depressed incomes and delayed payments by customers, the key focus areas would be avoiding default and conserving cash. The following questions are to be considered:
- How much debt does your company have?
- What is the debt category: senior, mezzanine, subordinate, etc.?
- Is the repayment up to date?
- Does current cash flow support debt service, assuming the debt terms do not change?
- Are there any penalties or accrued interest?
- What metrics are used to track debt performance? The idea here is to ensure that the ratios agreed to by the lender are within the limits set in your debt contract.
- What does the debt contract say?
On addressing these questions, the action points could be the debt restructuring, which helps reduce the debt burden on the company, or debt consolidation, where possible, with multiple facilities. This could help improve the cash flow position and achieve cost of funding efficiency.
“At the end of the day, the best thing you can do is be proactive! You should stress test the business using different scenarios on revenues achieved to see how resilient the organization is,” concludes Gugu.
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Find more details and apply here.
A version of the above was originally published by PFAN.