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Cash Flow & Working Capital Management

Rois Potamitis, Managing Partner

31 March 2020

 

The Covid-19 global pandemic and resulting economic environment will test businesses throughout the world.

Over the past few weeks, the unprecedented global COVID-19 crisis has directly and materially impacted economic activity throughout the world. This has caused many otherwise healthy businesses to experience material reductions to revenue while overhead expenses have remained fixed. The result has been a cash flow crisis, and even potential solvency concerns, for many businesses.

 

In particular the Cyprus economy has already seen the impact of Covid-19 in many ways with:

  • The closure of the travel and tourism sector, Cyprus’ largest business sector; 
  • Employees required to work remotely; 
  • The closure of the retail sector; and
  • Disruption to supply chains for many businesses.

If they are to survive, businesses must take immediate action to respond to these prevailing market conditions which are likely to continue for a significant period of time.  You need an immediate and robust business rescue y to give you the best chance to ride out the crisis and ensure long-term viability. Hard decisions need to be made and made quickly.

 


BDO recommends taking the following actions to manage your business through a crisis:

Understand your Cash flow

Understanding your current cash position, committed debt facilities and forecasted cash flows should be one of the key consideration for every business now.

You should understand your current position and your weekly cash needs under present trading conditions and understand the implications and sensitivities of those cash flows to further potential impacts on trade that might crystallize as we go through the crises.

You should calculate the cash reserves in the business and determine whether there is a risk of cash shortfalls and/or convent breaches in the weeks ahead that could impact your business.

 

Implement cost control measures

In times of crises the primary emphasis shifts from profitability to ensuring the business has the necessary liquidity to keep going.  The implementation of certain cost control measures may be required:

  • Understand what costs you actually need to run the business;
  • Analyse fixed and variable expenditure;
  • Develop a cost strategy:
    • Identify discretionary or non-business critical expenditure that can be eliminated immediately.
    • Consider overhead costs that through negotiation can be deferred, adjusted or removed (e.g. rent, equipment leases, employee costs).
    • Identify capital outflows that can be deferred or adjusted, including dividends, bank loan repayments or capital expenditure.
  • Engage with key creditors such as landlords, lessors, and suppliers, to explain your situation and attempt to negotiate standstill arrangements where possible.
  • Identify the measures in the government’s stimulus packages and support programs that are applicable to you. Determine how these support programs affect your cash flow and apply where relevant.
  • Monitor any cost reduction initiatives taken.

 

Manage working capital

Businesses will need access to cash to fund ongoing operational needs and must consider the level of cash “locked-up” in working capital:

  • You should monitor debtors and focus on cash collection. Understand that many businesses will fail.  Do your due diligence on customers and creditors to determine their credit worthiness before extending credit. 
  • Where possible change terms of business to require at least some upfront payment and ensure that credit limits are appropriate and strictly adhered to.
  • Negotiate favourable terms with suppliers – keeping in mind their financial situation and that they will also be closely monitoring and assessing the credit worthiness of their customers.
  • Understand your supply chain and take measures to deal with potential bottlenecks.  Where feasible you should optimise the level of stock on hand ensuring enough levels to meet expected demand but avoiding excess stock that locks up cash.
  • Evaluate tax payment obligations taking into account relevant support measures that have been introduced such as deferral of VAT and tax payments.

Communicate with your Bank

Communicate early and often with your bank/ lender as they may be the fastest source of additional liquidity in the weeks ahead:

  • Communicate early to explain the situation – providing detailed monthly forecast cash flow information;
  • Proactively engage with your Bank, who can assist you through a moratorium on existing facilities and/ or potentially the provision of additional funding;
  • Be transparent; and
  • Consider collateral and equity available to support finance and identify additional facility headroom

 

Consider alternative sources of finance

It’s also important to consider new financiers or products that may assist to bring forward cash receipts (e.g. asset-backed loans, debtor finance facilities or working capital loans as part of the government stimulus package).

Equity sources should also be considered:

  • Do existing shareholders have the capacity to contribute?
  • Are there logical buyers of your equity you can approach?
  • Do you have non-core assets that can be realised in a short time to generate cash?
  • Identify Government supports available to businesses.

BDO’s Corporate Finance team can assist businesses in preparing a rolling cash flow forecast, reviewing your cash conversion cycles, providing advice on the incremental funding options available during this time and assisting you with your negotiations with your banks.

For more information, contact  Rois Potamitis head of BDO Transaction Services or Petros Ioannides Partner, Restructuring Advisory.


BDO’s Tax team can assist in discussions with the Cyprus Revenue Authorities in relation to the potential deferral of VAT and tax payment obligations. 

For more information, contact Nikos Katsaris, tax partner or Angelos Petrou, Snr. Tax Manager.