Private businesses must build a liquidity resilience plan

The repercussions of the coronavirus pandemic are uncertain both in terms of severity and duration. There is absolutely no visibility as how things will evolve: how will demand be affected, how suppliers and clients will behave, whether supplies and staff will be available or not, what new state decrees may be issued and how these will impact businesses.

It is, therefore, indisputable that for as long as the crisis continues, the liquidity of businesses will be severely affected. It is a well-accepted axiom that the major factor for business shutdown and liquidation is cash shortage. As a result, the number one priority for business survival in times of crisis is none other than prudent and diligent cash management and planning.

All business managers and owners must immediately act, with external expert help and support if needed, in a coherent and risk or contingency-based way to safeguard the viability and survival of their businesses and the continuation of employment of their staff.

This means that business owners and managers must:

• take immediate action
• critically review their operational model insofar as income and expenditure are concerned: how will income be affected, are there alternative product/service delivery channels, are there alternative income streams, is there capacity to modify the operational model to make the cost structure more efficient, is there cost fat - built during better times - which can be shed?
• plan ahead their resources: raw materials and inventories, people, cash and bank overdrafts, to match demand conditions
• on the basis of the above, develop a detailed business/operational plan for the next three months, to start with, and a longer-term plan following that
• create a three-month cash flow projection plan, with elaborate and granular data on weekly cash inflows and outflows, and a rolling weekly adjustment process to provide a complete picture of liquidity requirements and challenges
• prepare a worst-case-scenario Plan B to cater for unexpected situations: as the crisis keeps evolving and developing, with absolutely no visibility at present, there is a high probability that original projections will not go according to plan
• talk right away with all key stakeholders: staff, key suppliers, key clients, tax and social security authorities and financing banks
• make arrangements to have immediate access to adequate and contingent liquidity facilities. This may be by way of cumulative cash reserves or by applying to their financing bank for relaxation of existing loan commitments and covenants and/or to obtain affordable short-term finance to meet projected liquidity requirements (under a base case scenario and worst-case scenario basis respectively). Bank interactions must be backed up by solid cash flow projections and plans.

Business resilience can be built on the basis ofrobust corporate governance structures and strong technocratic cash flow assessment and planning to secure adequacy of liquidity going forward. The viability of local businesses, which are the stalwart of the local economy, can and must be supported and safeguarded.

Rennos Ioannides, Board Member, KPMG Cyprus Credit Institute, [email protected]