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Finance Industry News

Short term cash management during COVID-19


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Short term cash management during COVID-19


"First, introduce a 13-week cash flow or review your existing cash flow model to ensure it is fit for purpose. "
Aaron Lowery, YFM Equity Partners



Aaron Lowery, Investment Manager, YFM Equity Partners (YFM):

The global COVID-19 pandemic has had a dramatic impact on the cash flows of most businesses in the UK. Preservation of cash to support liquidity will be key to ensuring the viability of many companies over the coming months.

It is always worth remembering the basic principles of cash management, especially given the current distractions, along with some of the additional options being offered by the Government. I’ve highlighted some of the key areas of focus from my perspective, leaning on my background in transaction advisory, and having helped several of the YFM portfolio businesses with their short-term cash management over the last couple of weeks.

First, introduce a 13-week cash flow or review your existing cash flow model to ensure it is fit for purpose. You need to ensure the cash flow model is updated on a regular basis, ideally daily; and also consider regular cash flow meetings, involving all stakeholders/employees who hold relationships with key customers and suppliers.

Identify areas of risks in your cashflow and introduce potential mitigations. Use the forecast model to run sensitised scenarios and be realistic about the impact of potential delays such as: customer receipts – model a significant increase in debtor days and consider that some customers may not pay for an extended period; issues with supplier deliveries – factory shutdowns and other restrictions may impact deliveries, consider dual sourcing or increasing stock levels; staff shortages; and production schedules.

Look to manage your working capital to ease the pressure on cash flow. Review your supplier payment and debtor collection processes and consider assigning additional resource to improvement debtor collection if required. Perform a review of your customers, prioritising which customers to continue trading with and, identifying any historical issues with payments and those which are likely to have any solvency issues in the near term. You should be imaginative/flexible with customer payment, particularly with customers you want to keep working with in the long term but may be experiencing short-term financial difficulties and consider proforma and advance payments where necessary. Identify suppliers that are critical to the business and ensure these suppliers are paid on a timely basis to avoid damaging long term relationships. You may need to consider deferring some payments on a short-term basis, but ensure you review these payments on a regular basis.

Reviewing the cost base of your business is another important exercise. Identify all non-essential spend such as training, travel, staff and client entertaining, etc which can either be deferred or cancelled. Also review all direct debits and standing orders and consider cancelling those which are deemed to be non-essential. Discussing the potential for any rent/lease holidays with landlords is another option. Ensure that all essential services and suppliers are paid on time and in full.

Management of employees is another key task. Ensure any potential actions are in line with Government guidance and try to reassure employees with regards to long term job security and salaries, where possible. Actions to ease short term cash flow issues include: reducing any planned overtime; ensuring booked holiday is honoured; considering pay cuts or a reduction of hours for some employees; furlough employees – the Government will cover 80% of salaries up to £2,500 per month; postpone any non-essential recruitment; and consider the deferral of any non-contractual bonus or commission payments.

Deferral of HMRC and local authority payments. Deferral of quarterly VAT payments until March 2021 has already been announced and deferral of PAYE and NI payments are being assessed by HMRC on a case by case basis. In addition, business rates have been abolished for this tax year for businesses operating in the retail, leisure and hospitality sectors.

Further areas of Government assistance. Consider applying for a CBIL, a loan of up to £5 million, for businesses with a turnover of up to £45 million, with the Government guaranteeing 80% of the loan. Also, the COVID-19 job retention scheme enables employees to be furloughed for a minimum period of 3 weeks.

Explore additional funding options with your existing lender. Be proactive and approach your lender to understand what further support is available to you. This may include considering a repayment or interest holiday; or extending the business’ current facilities. If you have any unutilised facilities, where possible, draw down the maximum available funds. It’s also worth considering new sources of funding such as ABL, IF facility, short term overdraft etc.

This is by no means an exhaustive list – with Government guidance and the funding options available changing on an almost daily basis, make sure you keep abreast of all relevant updates and seek advice from your accountant or a legal professional, where appropriate, to help guide your business through these uncertain times.

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