CASH FLOW MANAGEMENT
Eckaard Le Roux
23 March 2020
We all agree that the new COVID-19 virus is causing havoc in businesses around the world because currently Businesses experience little or no demand for their products and/or services, and they generate little or no cash.
Cash flow management and planning and the impact of cash shortfalls need to be assessed and reassessed on a continuous basis.
Although we may not have a clear picture of how and to what extent the coronavirus will ultimately affect our economy, we are able, at least with the evidence presently available, to state quite categorically that we can as a minimum expect a substantial disruption in the production and delivery of (certain non-essential) goods and services and a considerable cutback in demand.
For your benefit, we compiled a rundown taken from a number of expert sources (adding our own thoughts on the subject matter of cash flow management) of what we perceive to be ‘sound advice’. Below you will find some useful advice from chartered accountant Joe Kaleb on what to look at in your cash flow management plans to help give you the best chance of survival.
Generally, as a first step and from an insurance perspective, check whether you are entitled to indemnification under your business interruption insurance policy for damages arising from the disruptions caused by Covid-19. If not, because for instance your business interruption policy requires that there must be underlying material damage to insured property to trigger the business interruption section of a policy, you may also wish to check whether your policy includes an extension clauses for infectious or contagious diseases which extension does not require material damage as a condition to indemnification. If you do not have any cover, you should talk to your insurance broker to determine whether such cover can be obtained at an affordable price without any onerous exclusions.
- Review and adjust cash flow budgets
You should review and regularly (at least weekly) adjust your cash flow forecasts to determine what affect a reduction in your revenue stream will have on your ability to pay your day-to-day liabilities and the salaries of your staff. Instead of ceasing payment altogether, you should communicate with your suppliers and endeavour to put a working arrangement in place which creates a win-win situation for you and your supplier (who is probably experiencing the same cash flow problem as you). Meaningful communication is the key because your business reputation is also at stake.
- Review capital expenditure
Suspend investments in capital equipment until the current situation improves. However, if any stimulus package is offered by Government providing an incentive for capital investment, then such concession must be seriously considered.
- Assess financing options
You should not assume that your current overdraft facilities and other financing options which were previously available to you, will continue to be available in the future or be available on the same terms and conditions. You must sooner than later actively engage with your bank to ensure your existing facilities remain available (on the same terms and conditions), and to explore new or additional options should they be required on short notice. For example, you may need to consider factoring to generate faster cash flow from your receivables.
- Timely financial reporting
Ensure that your business’ monthly management accounts and annual financial statements are kept up-to-date so that you monitor cash flow, profitability, overheads, stock levels, and debtor and creditor balances regularly.
- Cutting overheads
Review your overheads and look for savings that can be generated by cutting discretionary overheads such as advertising, marketing, consumables, entertainment et cetera.
You as an employer has an obligation to protect your employees from exposure to infections (and needless to say you need to incur the necessary expense to put the essential precautions in place). However, your employees also have an obligation to assist you in keeping your doors open for business by complying with their employment obligations unless and until the law says otherwise.
Where labour is a significant expense in your business, consider ways of reducing staff wages to avoid retrenchments. For example, consider reducing temporary staff and redistributing work to permanent staff. Also, you might offer reduced working hours where allowed under legislation or an industry determination, or encourage staff to take available leave or leave without pay to preserve cash flow.
Be cautious when considering cuts to employment and be sure to check what employer subsidies (e.g. UIF payments) are available to you or your staff before making a decision. If you can maintain the headcount, it will be hugely beneficial to your business once normal trade conditions return.
If you consider retrenchment, be careful to follow the correct procedure which is fair to your employees. The Labour Relations Act specifies a very strict procedure which is crucial to follow regarding retrenchment. You are not entitled to amend the terms and conditions of employment agreements unilaterally. The steps to be followed in the retrenchment procedure should include notifying employees, consultation and implementation of the consensus. Please note that retrenchments will have cash flow implications such as the payment of severance pay, notice pay, outstanding leave and any other outstanding amount the employee is entitled to.
- Inventory management
With many businesses experiencing supply chain disruptions due to shortages in raw material and component parts, explore alternative supply chains with a view to increasing strategic stock levels as a buffer against the potential impact of a prolonged or much broader supply chain disruption.
- Debtors management
Now is not the time to let your debtors off the hook, so contact your clients/customers to encourage them to pay early or at least timeously. Consider incentivise them by offering discounts, but within reason.
Where clients/customers themselves are experiencing cash flow difficulties, consider negotiating periodic payments with them and ensure that they are enforced.
Review your bookkeeping and administration processes with a view to accommodate the following:
- quicker Invoicing as soon as the product/service has been delivered/rendered;
- regularly reviews of aged debtor reports and following up with slow paying clients/customers;
- regular reviews of contracts with client/customers to determine whether they may lawfully cancel orders; and if necessary, updating those contract terms to limit the ability of clients/customers to cancel orders
- Creditors management
Commence negotiations with your creditors, as they may be in a position to help in some way. Discuss such options as:
- payment extensions;
- cancellation of orders, or at least delay deliveries;
- contact your landlord and ask for payment extensions, possible rent reductions or variations to the lease; and
- contact your bank and ask for payment extensions on your mortgage.
- Consider alternative revenue streams
Where your business is experiencing declines in continued revenue streams, consider alternative ways to generate that income stream.
- Maintain your VAT and other tax obligations
It’s important that your VAT and tax obligations, including PAYE and so on are paid correctly and on time. This means, amongst other that you become familiar with any UIF benefits that may be granted to employers/employees
And if you’re unable to pay on time, enter into payment plans with SARS.
- Take advantage of government support when it becomes available
Governments across the world have announced stimulus measures to support businesses during this crisis. Look out for similar incentives if and when introduced by our Government. Incentives may be in the form of subsidies and tax breaks to keep businesses open and people in jobs.
- Business Rescue
If you still find that your business is in distress, there are a number of ways that you can proactively address the situation such as sale of assets, restructuring your business operational strategies, sales discounts and as a last resort (if you are threatened with court action), business rescue.
Regarding business rescue, there are three important considerations:
- If you as a board of directors has reasonable grounds to believe that your company is financially distressed, you must either:
- pass a resolution placing the Company under business rescue; or
- failing that, delivered a written notice to each affected person (employees, shareholders, creditors) setting out the reasons for not placing the Company under business rescue.
- “Financially distressed” means that the company:
- will be unable to pay all of its liabilities as they become due and payable within the next six months; or
- if it is reasonably likely that the company will become insolvent within the next six months.
- During business rescue proceedings, business enjoys protection against the institution of legal proceedings (e.g. the issue of a summons), including enforcement of court orders (such as attachment of property) and none of these actions may be commenced or proceeded with in any forum (this also includes arbitration proceedings) unless the business rescue practitioner or the court consents thereto.
The financial losses arising from the outbreak are likely to be felt for years to come. Our firm has extensive experience in assisting clients with advice and strategies ensuring that in difficult times like these, you can still continue to conduct business.