Our Previous article Respond: Shielding Your Business From COVID: Black Swan Of 2020” provided six recommendations to respond to the disruption caused by the COVID pandemic. One of the key recommendations was to focus on assessing the cashflow of the company.
It would be worthwhile to mention that cash and liquidity have played a very crucial role to maintain business continuity in any financial downturn- the current crisis is no exception. Even businesses with a strong balance sheet have struggled to sustain the financial blow during recession. Thus, to ramp up operations and reshape your business, you must monitor your cash and develop robust financial forecasts, allowing you to effectively navigate through possible contingencies. We recommend the following practices to the ensure the same:
1. Restructure variable costs and reconsider planned capital investments.
Reviewing and reducing the variable costs would help a company effectively reduce its cash outflows. Inevitably, the current crisis has clearly cut down various variable costs like expenses relating to travel, hiring and entertainment. But companies must consider reducing further variable costs wherever necessary. To mention a few, companies might consider reducing contract labours, encourage its employees to take available leaves and leverage technology wherever possible. Further to restructure its cost model, companies must revisit their investment plan. It is essential to defer capital investments that would produce results in the long haul and only implement the ones that would help the company rebuild or maintain its competitive advantage in the foreseeable future.
2. Manage inventory effectively
Uncertainty is the only certainty during such downsides. A resurgence of a COVID-19 wave cannot be ruled out. Thus, companies are still exposed to the risk of experiencing supply-chain disruption in future. To deal with any such event, companies will have to revisit their inventory safety parameters, add further inventory to their existing buffer stock and renegotiate its arrangements for stockholding facilities with suppliers, to tackle any possible demand and supply side volatility.
3. Synergize payable and receivables
An alternative way to preserve the working capital of any business is to effectively balance its payables and receivables. Prioritize paying suppliers that are critical to servicing the demands of the customers and extend payment terms with others. Companies should use this approach cautiously, as they certainly would not want to strain their supply relationships. Just like any company would be strategizing to delay payments to their suppliers, its own customers might also be planning to do the same to the company. Thus, it is all the more important to revisit the company’s collection process. To strengthen the same, companies should focus on the KPI’s of payment performance. For instance, incorporating working capital metrics to the company’s standard revenue and profit tracking report, will give a better picture about the day-to-day sales outstanding, collection rates, percentage of customers who pay late, timely invoicing, etc. This will help the companies strategize better in improving their collection process.
4. Forecast and re-forecast
A plausible way to navigate through this uncertainty, is planning and preparing your business for multiple scenarios through financial forecast or projections. To perform a forecast effectively, it is advisable that companies must define the following:
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