Navigating through Covid-19: a business checklist
Covid-19 has caused and will continue to cause wide ranging disruptions across industries. Companies across the board are activating their business continuity plans (BCPs). Yet even as the news cycle covers about the impact on large, visible enterprises like airlines or hotels or software companies, what is perhaps missing is a focus on small and medium enterprises (SMEs). SMEs are the lifeblood of any economy; represent about 90% of businesses and more than 50% of employment worldwide. Yet in the context of Covid-19, it is safe to assume that they are less likely to have BCPs in place. And they are more likely to be vulnerable to a liquidity shock, caused by a revenue slowdown, extended payment cycles, receivables write-offs, etc. If you are an SME in this situation, things might already be getting tough with an even gloomier outlook. However, it is not all doom and gloom. There are sensible measures you can take TODAY to improve your liquidity so that you avoid a deterioration in credit scores and a future fall out with your bank.
These are some of the measures that an SME Owner or CFO should follow at the earliest:
1. Revise your Cash Flow Forecast for next 12–24 months considering the impact of Covid-19 on your business.
2. Conserve your cash. As a business, if you have cash reserves, do not be tempted by low priced assets that might be available due to the market crash, unless they are cashflow accretive.
3. Schedule a meeting (virtual!) with your Bank proactively to discuss the impact of the economic slow down. Ask your bank what plans they have in place to help their clients like yourself.
(a) Identify the potential requirement for a short term to medium term (3–6 month) working capital limit that will give you head room to operate without any stress of over borrowing or requesting a credit limit at the last minute.
(b) If you have a borrowing that requires a regular payment to the bank, request for a repayment holiday, i.e a moratorium for a short tenure to postpone your capital repayment.
(c ) It’s time to take a fresh look at some of your existing bank borrowings and their use/purpose. If your bank borrowing is not structured properly, it’s a good time to have a discussion. For instance, if you are a supplier to a large corporate/ blue chip company, find out if the bank will discount the invoices and give you a credit line based on the invoices. If you are a wholesale buyer or seller, the transactions can be structured under trade finance. Explore instruments like Letters of Credit (LC), or LC Discounting etc to accelerate cashflow.
(d) Consider a Revolving Credit Facility (RCF), which gives you the flexibility to withdraw, repay, and withdraw again.
(e) In addition to the above, obviously scrutinise your outflow and try to cutback on optional expenses.
We are in a situation which needs financial institutions and businesses to come together. One cannot flourish without the other. Try to work with your bank as a partner. It’s times like these, when a little help goes a long way.