Cash management 101 during Covid-19
IFA member Faisal Sheikh has developed a strategy for business survival and restoring financial control after the effects of the global pandemic.
Covid-19 and the ensuing global recession have wrecked the entire financial system. In Q2, GDP in the UK shrank by a whopping 20.4%. In contrast, throughout the 2008 recession GDP contracted by no more that 2.1% in a single quarter. Entire industries such as aviation are collapsing and even billionaires such as Richard Branson were asking for government bailouts.
As we speak, operational budgets are being ripped up as companies across the globe attempt to adapt to the new normal. The adage ‘cash is king’ has never felt truer and even at the best of times managing liquidity is an art not a science. So, what are businesses supposed to do?
My formula for survival is simple - simultaneously Smash, Grab and Go:
SMASH fixed costs, especially rent, as home working is becoming the norm. Vendor solutions such as Microsoft Teams are successfully allowing collaborative working and above all protecting your key asset, your employees. This will make your business agile and allow you to operate, albeit in the short term (may be medium term), around your break-even point.
GRAB your receivables by the scruff of the neck; now is the time to send legal notices to those nasty and loss-making ‘120 day-ers’. Even if they are big high street brands, ‘name and shame’ and stick that list on social media so that they stop taking advantage. If your situation is dire then consider factoring, but your customers must be credit-worthy.
Grab that slow moving or problematic inventory, take a deep breath and flog it. Your working capital position will improve and you will be in a better position to secure further lines of credit or renegotiate terms.
GO after your customers, forget your financial backers such as the lenders, because your customers stuck with you through thick and thin and religiously bought your product or service and importantly bought into your vision. Talk to your most valued customers rather than knee-jerk price slashing or deep discounting.
The American company Saks Fifth Avenue faced this challenge during the 2001 recession and undertook deep price cuts that temporarily enhanced revenues but dented its luxury status for many longstanding customers. If the ‘customer is right then the market must be right’, thus create a range of offerings such as deluxe, standard and budget or recalibrate your product offering without jeopardising quality or consistency and crucially hard-won customer loyalty.
The US car insurer Progressive Corp discovered how sensitive policyholders were to reimbursement delays in respect of written off vehicles. They cut the payment cycle by 35 % and witnessed customer loyalty shoot up by 50%.
In short, if you listen, I believe that your existing and new customers will continue to stick with you.
Faisal Sheikh is an IFA fellow and accounting and business lecturer at Salford Business School