Over recent weeks, the unprecedented global COVID-19 crisis has directly and materially impacted economic activity in New Zealand. 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 New Zealand businesses. Even if your business is not yet in this situation, an immediate and robust COVID-19 business plan is necessary to give you the best chance to ride out the crisis and ensure long-term viability.
We recommend clients follow the outlined steps below to best prepare and manage their way through this business crisis.
Step 1 – Build your ‘new world’ cash flow forecast
The world and business environment have changed quickly. It’s essential that boards and management have visibility on the new reality in order to make informed decisions. To do so, businesses need to build a three-month weekly cash flow forecast that takes into account their ‘new world’. Once the next three months is understood, the forecast should then be extended a further nine months (monthly).
While building your cash flow forecast, it’s important to consider the impact of disrupted revenue streams while retaining committed expenses as they currently stand. This will identify if cash flow is still positive given current conditions. If not, businesses need to understand their cash burn and what the timeframe is before existing reserves are exhausted (follow steps 2 to 7 to assist with this process).
Step 2 – If you have a cash deficiency now or coming up –identify measures to reduce costs
Identify discretionary or non-business critical expenditure that can be eliminated immediately. Next, consider overhead costs that through negotiation can be deferred, adjusted or removed (e.g. rent, equipment leases, employee costs). Lastly, identify capital outflows that can be deferred or adjusted, including dividends, bank loan repayments or capital expenditure.
Step 3 – Engage with key stakeholders regarding potential standstill arrangements
This step will be critical to business success. Businesses need to engage with key creditors such as landlords, lessors, IRD and suppliers, to explain their situation and attempt to negotiate standstill arrangements where possible. An independent report from your accountant or financial adviser on your financial position can assist with these negotiations.
Step 4 – Conduct due diligence on other capital sources available
Consider collateral and equity available to support finance. As part of this step, engage with existing financiers to:
- Bring them into the fold –they can be one of your biggest allies in these situations
- Identify additional facility headroom –consider drawing down cash and stockpiling on your balance sheet
- Identify new facilities available from your existing financiers
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 here. Questions to consider include:
- 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?
Step 5 – Consider government support available
Identify the measures in the government’s stimulus packages and government support programs that are applicable to you. Determine how these support programs affect your cash flow and apply where relevant.
Step 6 –Develop a 90-day COVID-19 business plan to maintain solvency
Use the knowledge gained through steps 2 to 5 to develop a 90-day COVID-19 business plan. The plan should include action items with respect to:
- Implementing the cash flow measures as identified above (i.e. apply to the financier for funds and negotiate with creditors for standstills)
- Engaging with key stakeholders such as employees, financiers, landlords, customers, suppliers and remaining creditors to ensure they understand your position and what you need from them to continue business.
Step 7 – Update your cash flow forecast for outcomes of steps 2 to 6
Re-evaluate your cash flow forecast to align with your 90-day COVID-19 business plan. As outlined in step 1, set your initial forecast for a period of 90-days on a weekly basis to be sure you can remain cash flow positive. Once you are confident you can manage through the next 90-days, extend your forecast for a further nine-month period. Remember to take into account any timeframes of standstills agreed to determine when you will exhaust cash reserves.
Step 8 – Implement the plan and monitor regularly
Now that you have developed your COVID-19 business plan and cash flow forecast, start engaging with relevant stakeholders to put the plan into action. Monitor progress regularly and keep updating your cash flow forecast (we recommend weekly to begin with) to monitor the strength of your cash reserves