Financial Management Checklist for COVID-19 Response

According to an official federal government announcement on Wednesday, the U.S. economy shrank by 4.8% during the first quarter of 2020, marking the precursor of what’s expected to be a much worse outcome during the second quarter.

In fact, the Congressional Budget office has estimated that economic activity will plunge in Q2 of 2020 by a 40% annual rate.

This would mark the worst quarter since such records were first compiled in 1947 and would be four times the size of the worst quarterly contraction on record, which occurred in 1958.

Economists and government officials are making similar projections in other countries where the COVID-19 pandemic is taking an enormous toll on national economies.

But the real story behind the economic plunge starts with what’s happening at the individual business level. The latest numbers and forecasts are the macro-level reflection of what’s going on at the ground level, and they underscore how it important it will be for companies to manage cash, working capital and liquidity in the weeks and months ahead.

Most companies have already been working furiously to take the right steps to anticipate and manage cash flow and protect themselves from financial risk and damage during COVID-19. But even if you’re already revising and executing your financial plans, it’s a good idea to check everything you’re doing against best practices during a financial crisis.

To get started, you can follow the checklist below, which we’ve put together based on recommendations from some of our top Graphite financial consultants and general best practices during financial uncertainty.

1. Manage Your Cash and Liquidity.

Many companies are seeing less revenue during the COVID-19 pandemic, which means there’s less cash flow and there are often delays in receivables collection.

Identify key cash flows that might be impacted, and assess available cash to identify how much cash you have and where it’s located. It’s also important to know if any of your cash is restricted or if it’s readily available.

Developing an awareness of your cash reserves, shortages and liquidity is a key starting point for developing a defensive position. You should also be modeling worst-case scenarios and possible changes in financial realities, so you can anticipate potential changes and react in a measured and effective way.

Here are a few key questions to ask:

  • What’s the status of our cash and liquidity right now?
  • What’s our current cash position and what are our short-term working capital needs?
  • How might things change in the next 90 to 120 days?
  • Which expenses are non-essential and can be reduced?
  • How might the current economic environment impact our suppliers and customers?
  • Can we reduce inventory and make other changes to working capital practices to reduce exposure and risk?

2. Forecast Your Short-Term Cash Flow and Run Multiple Scenarios

Take a look at your potential cash needs over the next 3 to 6 months. Develop a forecast that quantifies the potential impact of trigger events such as macro-level economic changes or issues specific to your customers, suppliers and supply chain.

Model different scenarios and use what-if analysis to anticipate possible effects from reductions in cash or other negative developments. Think ahead and model for different possibilities so you can make fast and effective decisions when conditions present themselves.

Here are a few questions to inspire the process:

  • What are our cash needs for the next 3 to 6 months?
  • Which events might impact us and how much?
  • What actions will we take if those trigger events occur?
  • Do we have contingencies in place for downside scenarios?
  • Beyond our short-term picture, what are our long-term cash needs and alternatives?
  • How will this impact our budgets and forecasts for the remainder of the year and 2021?

3. Protect Your Financial Position.

Once you’ve assessed and modeled your short-term outlook and contingencies, you need to take action to generate and conserve cash and address liquidity and your working capital requirements. You may also need to look at getting access to funding or increased funding.

Here are some key defensive steps you can take to protect your business financially:

Increase your collection.

Assess and prioritize your customer cash collection, and consider using early payment discounts to encourage collection. You may also need to need to evaluate your customer credit risks and capabilities, and take any appropriate action to minimize risk and improve working capital.

Minimize outgoing payments.

Review all outgoing payments to identify non-essential payments as well as discretionary spending you can reduce and capital expenditures you can potentially defer. Quickly develop and execute a cost-reduction plan to improve your cash position. Reprioritize outgoing payments and look for opportunities to work with vendors to delay outflows.

Match your inventory to anticipated sales.

The supply chain is a crucial target for minimizing financial exposure and risk. Re-assess your inventory needs to make sure your requirements match updated forecasts for sales. Adjust your forecasts and re-evaluate replenishment triggers and targets to control production and inventory. Challenge, adjust or cancel new sales orders where possible.

Restructure your debt and seek alternatives.

Give careful consideration to renegotiating or restructuring any loans or loan covenants, especially if you anticipate potential problems from your overall financial modeling. If you anticipate any liquidity issues, make plans to raise new capital through bank debt, subordinated debt, term-B loans, or other favorable options.

Use other financial strategies.

  • Look for state or federal funding, incentives, or tax credits that your business may be qualified to receive.
  • Explore supply chain finance as a way to lower costs, improve efficiency, and optimize working capital.
  • Consider selling off non-core businesses or assets to generate cash, or evaluate sale-and-lease-backs as an alternative.
  • Use repatriation to reduce cash that may be restricted or trapped in foreign subsidiaries or overseas operations.

4. Consider Setting Up a Program Management Office.

To centralize financial control, visibility and communications, consider setting up a program management office (PMO). A PMO can help ensure consistent management, reporting and communication during a financial crisis while controlling expenditures and making key decisions to conserve and maximize cash flow.

5. Get Contingency Planning and Expert Financial Help If Needed

If you don’t have the tools, processes or in-house resources to assess your financial situation, develop models and scenarios, and manage your finances optimally, consider bringing in outside experts.

Financial consultants are an invaluable resource during a crisis. They’re able to provide expert advice, guidance and hands-on management to develop and execute the right financial plans and models. Many have proven experience in managing corporate finance successfully during economic downturns or recessions, and they can provide an objective, third-party voice to help plot your best financial course moving forward.

At Graphite, were connecting companies to some of the world’s top independent financial consultants through our online platform. Our network provides access to over 6,000 top-tier consultants, including hundreds with backgrounds at Big 4 accounting firms such as Deloitte, PwC, EY, and KPMG.

Our experts also include some of the world’s top CFOs, VPs of Finance, and financial analysts at Fortune 500 companies and similar firms. You can post a project in minutes and start interviewing candidates within a few hours, and it all happens remotely and via the cloud.

To learn more about the possibilities, search some of our public consultant profiles, and post your project, visit us now at www.graphite.com to get started.

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Greg Andrade

Greg Andrade handles Graphite's marketing and communication programs. A graduate of the University of Michigan, he worked in corporate marketing for 15 years before turning his focus to virtual marketing consulting for startups and global businesses.

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