Covid 19 has changed almost eveything around us. Businesses are all around the world has been also affected and people are losing thir jobs because most businesses don’t have fund to give them salary.
However, no one ever thought that a situation like this would come into their life, but now we have to accept it and shift business strategies according to that. There are plenty of other challenges out there but the one that concerns business owners is managing cash flow during this pandemic.
In today’s post, we will talk about how to manage working capital during a period of crisis.
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How to Manage Working Capital During Crisis
As a typical “black swan” event, COVID-19 took the world by complete surprise. This newly identified coronavirus was first seen in Wuhan, the capital of Hubei province in central China, on December 31, 2019 since then it has taken millions of lives.
More importantly, more than 75 countries are now reporting positive cases of COVID-19 as the virus spreads globally, impacting communities, ecosystems, and supply chains far beyond China.
The focus of most businesses is now on protecting employees, understanding the risks to their business, and managing the supply chain disruptions caused by the efforts to contain the spread of COVID-19. The full impact of this epidemic on businesses and supply chains is still unknown, with the most optimistic forecasts predicting that everything would be normal soon but rising cases of coronovirus make it doubtful.
However, one thing is certain: this event will have global economic and financial ramifications that will be felt throughout global supply chains, from raw materials to finished products.
Businesses that are currently struggling for profitability—those with low cash reserves or unstable cash flows— are particularly vulnerable.
However, even businesses that appear to be in good financial shape may not be immune, depending on how the situation progresses, and how long it takes for demand and supply chains to return to normal.
Businesses in sectors such as tourism, hospitality, entertainment and air transportation have been particularly hard-hit in the short term. Businesses in consumer goods and retail may also be at higherthan-normal financial risk.
Responding to the immediate challenge
Given the importance of cash flow in times like this, companies should immediately develop a treasury plan for cash management as part of their overall business risk and continuity plans. In doing so, it is essential to take a full ecosystem and end-to-end supply chain perspective, as the approaches you take to manage cash will have implications for not only your business but also for your customers.
1. Ensure you have a robust framework for managing supply chain risk
Supply chain management is a complex challenge, and finance-related problems only add to the risk. Do you know if any of your customers are in trouble and might be unable to pay for the goods and services you deliver?
If you manufacture a product and want to sell it to someone outside your borders, you typically require a letter of credit from a prime bank that proves the buyer can pay.
This letter of credit not only provides a source of ultimate payment, but it can also be used to secure inventory financing while the goods are in transit—so it’s important to make sure these letters of credit are still reliable.
Ensuring you understand the financial risks of your key trading partners, customers, and suppliers is a critical consideration in times like these.
2. Ensure your own financing remains viable
In these circumstances, don’t assume the financing options you previously had available to you will continue to be available. Undertake scenario planning to better understand how much cash you’ll need and for how long.
Use this opportunity to actively engage with your financing partners to ensure your available lines of credit remain available, and to explore new or additional options should you require them.
3. Focus on the cash-to-cash conversion cycle
Under normal business conditions, companies primarily focus on the profit and losses–growing the top line while managing the bottom line. Routine back-office activities such as paying bills and turning receivables into cash are often taken for granted.
In the current abnormal business conditions, smart companies are shifting their focus from the income statement to the balance sheet. Of the three elements of supply chain working capital–payables, receivables, and inventory–, supply chain executives have a tendency to focus on inventory.
But, in order to minimize working capital requirements during challenging times, it’s important to apply a coordinated approach that addresses all three areas.
4. Think like a CFO, across the organization
As supply chain managers step up to the challenges of disruption and inventory shortages, they generally spend their days thinking about operations and don’t pay much attention to finance and treasury issues.
More often than not, inventory levels and other critical business parameters are driven by customer service requirements and operational capabilities, not financial constraints.
But what if the situation was reversed?
What if working capital was the company’s primary constraint on inventory, and supply chain managers were given the challenge of making it work? How would that affect your supply chain and inventory practices?
5. Revisit your variable costs
Reducing your variable costs is often a quicker way to immediately reduce your cash outflows than focusing on your fixed costs. Of course, there are the typical variable cost-reduction levers, such as imposing travel bans and non-essential meeting restrictions (which might already be in place as a way to manage employee safety), imposing hiring freezes, and placing restrictions on discretionary spend like entertainment and training.
When labour is a significant cost line in your business, consider avenues that might help reduce spend to avoid getting to a situation where layoffs are required.
For example, look for opportunities to reduce contract labour and re-distribute work to your permanent workforce. Encourage employees to take available leave balances to reduce liabilities on the balance sheet. And, if necessary, consider offering voluntary, or even involuntary, leave without pay to preserve cash.
6. Revisit capital investment plans
With cash flow forecasts in mind, consider what’s really necessary for the near term. What capital investments can be postponed until the situation improves?
What capital investments should be reconsidered? What capital investments are required to position for the rebound and for creating competitive advantage?
7. Focus on inventory management
Companies are at risk of experiencing supply chain disruptions due to shortages in raw material and component parts. Inventory safety stock parameters will most likely need to be updated to reflect the increased demand and supply-side volatility, which will have the effect of increasing overall inventory levels, assuming that’s possible.
At the same time, businesses will be thinking about securing additional inventory, or strategic stock, as a further buffer against the potential impact of a prolonged or much broader supply chain disruption.
Also at the same time, from a cash flow perspective, companies may be considering actions to reduce finished goods inventories, especially in perishable products, where waste is an important consideration and markets remain difficult to access.
Balancing the demands for more buffer inventory and managing cash flow may not be as easy as it sounds. Companies that still use simplistic approaches to inventory management might be able to do a quick assessment and find some immediate opportunities to drive down inventory.
However, many companies are likely to find that significant inventory cuts have an adverse effect on customer service and production. Sustainable savings will most likely require fundamental improvements in end-to-end supply chain inventory visibility, demand planning, inventory, and safety stock policies, production planning and scheduling, lead-time compression, network-wide available-to-promise, and SKU (stock keeping unit) rationalization.
There is nothing that you can’t beat if you have a solid plan for that. The same goes with crisis, there is always a way, all you need to courage to find the solution. Let me know your thoughts on this post in the comment section.
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