Covid19 is a damming infectious disease that has taken grip of all world countries. My gratitude goes out to all the front-line working people that are fighting this plague and those that are risking their lives in keeping our economies going… I also offer my sincere condolences to those who have passed away and their friends and family.
The crisis we are living through at present is unprecedented, with quarantine facilities set-up, border closures, educational establishments closed and social distancing the norm. Digital connectivity has now become fundamentally very important to sustain business operations, as remote working becomes the rule across much of the UK. The need for frequent, transparent communication with colleagues and stakeholders has ramped up in importance as business conditions, updates on Coronavirus epidemic data constantly changing day by day if not hour after hour.
What can Finance Leaders do to help?
As a humble and patriotic person, what can I do to help? In my opinion as a seasoned qualified chartered accountant and treasurer, the first thing to address is the immediate concerns about safety and survival, stabilising the business and positioning it for recovery- a simple 3-pronged business plan of attack (against Covid19).
Moreover, the Covid-19 crisis is mostly one that impacts liquidity and causes financial stress for everyone. As Covid19 has spread, thousands of companies have had to close permanently and even temporarily. Our supply chains have been disrupted with Consumers’ no longer able to make discretionary purchases (within reason).
Finance Leaders top priority, therefore, has to be about optimising cash reserves, as the magnitude and duration of the crisis remain unclear. Specifically, the CFO (and fellow Treasurers) should focus on assessing the company’s liquidity by launching a centralised cash committee, evaluating the scenarios based on potential paths as the virus unfolds and rolling out an internal and external communications plan.
Never forget Cash is King
An obvious candidate, where cash and cash equivalents and working capital should be assessed and any incremental borrowing needs be contemplated on, post undertaking cash flow forecasting if not previously done. Focusing on cash collections (account receivable) from sales is of critical importance if this area has been neglected in the past, with a need to chase overdue payments, notwithstanding that a large majority of other companies will be delaying payments too under the circumstances.
Drawing down on arranged cash facilities if not previously touched may need revisiting, but only after exhausting all other possibilities concerning payment terms (classic leading and lagging cash techniques). A noteworthy point to mention is to also seek relief on existing restrictive debt covenants as early as possible to strengthen the balance sheet, including prioritising payments into buckets of needs and wants/ criticalities.
For further reading ¹, refer to my article on “Five ways to manage cash better”: https://www.treasurers.org/ACTmedia/Jul-Aug15TTdeekothan36-37.pdf
Strong Financial Planning & Analysis
Scenario planning either using excel or an integrated software package will be a must during this period of heightened uncertainty. The CFO will need to articulate clear thresholds or trigger points that suggest what financial actions the company will need to take and when, whilst keeping a keen eye on which other geographies or industries that are poised for faster recovery than others. Forecasts should also incorporate both macroeconomic and group/ company-specific data to identify major areas of EBITDA risk. The forecasts should also identify secondary impacts like geographical supply-chain disruption, employee dislocation, as well as likely sources of cash leaks and accounts receivable projections.
Having a firm handle on your company’s critical leavers and drivers (KPIs) through decision support analytics will help navigate and highlight where resource and efforts need to be directed. My favourite, that I have often used with clients is balanced scorecards combined with lean sigma (red and green only) status “decision dashboards” to help focus on a handful of metrics that will guide the organisation.
Some finance organisations may lack CFO with the skills necessary to elevate or build an FP&A team where such skills are in short supply. Recruiting seasoned consultants with a combination of digital, finance and business expertise may be required as a way forward. ¹
Operational improvements to achieve equilibrium
Next up, some forethought needs to be expanded into making operational improvements to boost productivity, possibly re-evaluating investment portfolio and investing in the finance function’s capabilities. Furthermore, operational moves to support near-term performance improvements to firm up revenues via the development of new products and services could well assist customers’ who are experiencing financial difficulties thus promoting “loyalty from a valuable customer base”, e.g., here to help. The reallocation of resources to areas with strong revenue streams and optimising the company’s use of e-commerce delivery channels are not to be ignored either.
Decisive actions for reducing operating costs will be of critical importance to maintain flexibility whilst balancing those cost-cutting measures versus the need to ramp back up operations as the UK economy recovers.
Take a closer look at your Balance Sheet… and think hard
For those of you who have an appreciation for the technical applications for IFRS standards, watch out for discussion with your auditors on IAS 36- impairment of assets, in particular intangibles (capitalised development, goodwill and the like). Not to mention, IFRS 9 that specifies recognition and measurement guidelines on the impairments of loans and receivables measured at amortised cost or FVOCI. Oh yes, the “expected credit losses” model will need exploring and understanding during Covid-19, as no doubt companies will be facing problems with their receivables. Lastly, IAS 37- Provisions, Contingent Liabilities and Contingent Assets should be considered too.
I am often surprised with various clients’ I have worked with over the years (rightly or wrongly) that often have a relaxed attitude towards reviewing their balance sheet, this is especially true for business units where their sole focus is profit & loss. At their peril missed tricks will eventually hit their P&L if areas such as refinancing debt; reducing inventory, accounts payable and receivable terms are not looked into. Getting your balance-sheet in order promotes flexibility whilst staying focused on KPIs.
Capital appraisals on R&D, IT and other capital allocations may have different out-turns under the Covid-19 crisis. The CFO will need to switch tact and not just look at higher returning projects but also examine payback profiles and internal rates of return to take decisive actions.
Transformation change is by its nature iterative. Although its phases overlap and interact, the sequence does matter. Furthermore, you can also learn from the experiences of path-breaking companies that have preceded you. Therefore, a general road map will help finance folks plot their course or identify missed turnings that may be slowing progress.
My tried and tested method with prior clients is to use a six stepped approach covering: Directional setting; Process design; Performance improvement; Realignment; Bag all Quick Wins; and Change management through embedding and growing.
For further reading on this ¹, refer to my article on “How to do a Finance Transformation Programme Properly- Myths Dispelled”: https://dipakagkothari.wixsite.com/website/single-post/2018/08/12/How-to-do-a-Finance-Transformation-Programme-Properly–Myths-Dispelled
Mergers & Acquisitions… including Divestitures
Take away thought… wavering markets and plummeting share prices create excellent conditions for M&A activity. Determining how to use M&A as a tool to manage the current crisis by divestitures or joint ventures, capital rationing toward high-priority synergistic gains via product, service, geography and supply-chain related benefits is worthy of mentioning here.
If this may on the cards refer to my ¹ “10 questions to help make your strategic partnership successful” before embarking in M&A and divestitures: https://dipakagkothari.wixsite.com/website/single-post/2018/06/05/10-questions-to-help-make-your-strategic-partnership-successful
Digitalisation… the new era
The finance team’s use of digitisation to help the company manage the crisis should not be considered an onetime event. Digital initiatives that once seemed out of reach… from automated closings to real-time forecasts, are now business-critical.
For further reading ¹, refer to my article on “The Future of Digital Finance”: https://dipakagkothari.wixsite.com/website/single-post/2020/02/28/Future-of-Digital-Finance
Communication plan… use the KIS (keep it simple) approach
Look, I won’t beat around the bush here!
In short, all Leaders need to be visible with their plans, honest with their words and adaptable with their actions, whilst above all, maintaining compassion for the situation and the impact the current crisis (Covid-19) is having on the organisation.
Don’t hide behind emails, embrace videoconferencing and let your face and voice be seen and heard to bring that human element to the situation.
I recall the masterful Charlie Chaplin’s final speech in the film “The Great Dictator” … I mention this because as a nation we are always engaged in the politics of the moment, therefore it’s good sometimes to just step back and reflect on our true goals.
Chaplin’s speech at the end of The Great Dictator I believe illustrates an excellent road map of how we can conquer the current issues we face now and how a selfless leader should view the world and the organisation.
To see Chaplin’s famous speech (on YouTube): https://www.youtube.com/watch?time_continue=4&v=ibVpDhW6kDQ&feature=emb_logo
On that final note… to all my existing contacts, new readers, past and future clients’, please stay safe and keep well.
Dee Singh Kothari is a senior partner in Kothari Partners.
Dee is a results-oriented international Interim Professional with extensive senior finance experience over 22+ years PQE within Listed/ FTSE, SME and PE-Backed companies. He has worked in demanding business environments as an Interim either as Finance Director, Treasurer or Consultant. Extensive experience within numerous sectors in the UK and overseas. He is skilled in driving efficiency and productivity through technical expertise and commercial acumen to deliver practical and innovative solutions in rapidly-evolving environments and challenging economic conditions.
¹ At Kothari Partners, we have worked with various UK and overseas listed and PE-backed clients’ across various industries to consider how their business and finance services can bring them both cost reductions and performance improvement.
Our approach is to help our clients understand their current situation, identify the value and decide on the scope, vision and set of strategies for what they could achieve for their business. We help plan their implementation and support them and deliver the solution/ change needed, so it is properly and permanently embedded in their organisation.
We aim to help past and future clients by delivering high-quality work to their organisation, generate real efficiencies and free up time to support better business decisions. For a confidential discussion please free to contact us, via our corporate website https://dipakagkothari.wixsite.com/website