Column: Liquidity & Cash Management

This is the first in a four-part series prepared by Restructuring and Insolvency Specialists Association of Bermuda [RISA Bermuda], on insights to help small- to mid-size organizations manage financial, operational, and staffing considerations, as well as directors’ duties and responsibilities, in view of the current COVID-19 crisis.

Financial considerations – working capital and liquidity management

Working capital is defined as the net funds available to a business for use in its day-to-day trading operations. It is calculated as the difference between an entity’s current assets [one that can be converted to cash within a year] and current liabilities [amounts due to be paid to creditors within a year].

Liquidity is defined as an entity’s ability to pay off its debts when they are due, or how easily and effectively an entity can access cash when it needs to cover its debts.

During times such as these, it is important to increase both working capital and liquidity in the short term. Below are five key areas which should be considered immediately:

1. Financial controls and cash flow management

Businesses that are most at risk are those that are able to survive comfortably during “normal” times without having strong, timely, and accurate financial controls over cash. Considerations include:

• Are there appropriate segregation of duties ie delegating financial duties to multiple employees? This may be difficult for smaller entities.

• Are you confident of all the people that are authorized to handle cash or make cash transactions on behalf of the entity?

• Are business and personal finances kept separate?

Access the entity’s current cash position and customers’ demand to determine the cash flow management approach:

• Prepare a cash flow forecast on a rolling 1- and 3-month basis. Forecast should be realistic but conservative. Adopt a regular basis [for example every 2 weeks or a month] to revisit the forecast and compare to actuals, adjusting the forecast accordingly;

• Develop a culture of cost optimization on an ongoing basis – define “essential” and “necessary” spending. Are there current commitments which can be put on hold or adjusted to current requirements?

2. Inventory management

Declining demand can lead to excess inventory in all phases of production. In this environment, the focus of inventory management shifts from guaranteeing a supply to reducing inventory stockpiles, which requires a different mindset and approach. Considerations include:

• Analyze current stock levels relative to new demand outlook;

• Cancel, freeze or postpone supplier orders as soon as sales begin to decline;

• Reduce levels of buffer stock; and

• Create programs to promote sales of products with excess inventory [product campaigns, product bundles, add-on packages or bulk purchase discounts].

3. Account receivable management

With reduced demand, receivables management needs to change drastically. Receivables will become an area to attract sources of cash. Considerations include:

• Reevaluate existing credit policies/payment terms;

• Impose stricter guidelines for credit approval to minimize risk exposure to bad or irrecoverable debts;

• Understand customers’ financial capability before doing business;

• Collect deposit/advance payments; and

• Early invoicing, or issue payment reminders, to reduce risk of doubtful debts.

4. Account payable management

Accounts payable can represent a low-cost source of funding. Vendors can have powerful motivation to keep long-term customer relationships. Anticipate early on if the entity will have problems paying creditors in a timely manner and engage in honest and pro-active discussions with vendors. Prioritize discussions with critical vendors. Vendors approached early with honest dialogue may have more likelihood to accommodate requests. Other considerations include:

• Renegotiate for extended payment terms;

• Request discounts for prompt payment; and

• Assess suppliers’ production capabilities. If a supplier that provides critical materials or services is in financial difficulty, you need to consider purchasing larger volumes or source from other suppliers.

5. Financing opportunities

Assess the need for short-term financing. Take advantage of relevant government policies and support. Considerations include:

• Organizations such as the Bermuda Economic Development Corporation are offering Covid-19 relief to qualified local business owners. Visit here.

• Banks have also offered support. Visit here

*RISA Bermuda consists of accountants, lawyers, and other individuals who are directly or indirectly engaged in the business of insolvency and restructuring in Bermuda. Refer to www.risa.bm for further information. No insights from this article constitute legal, financial, commercial or other professional advice.

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