How CFOs can build resilience to get through the coronavirus crisis
The global outbreak of coronavirus (COVID-19) has led to high volatility in financial markets and economic instability across the world. To bring stability to financial markets and provide liquidity, the governments and central banks around the world have taken various measures, including providing unemployment benefits and financing for small businesses.
For organizations, the coronavirus crisis has become a battleground to execute an emergency crisis response plan while also creating long-term sustainable solutions to survive in such complicated situations in the future. Three critical aspects can help Chief Financial Officers (CFOs) reduce the brunt of the present downturn on business operations.
First and foremost, cash and liquidity management is an important aspect and should be one of the top priorities for organizations, especially during a crisis. While established companies are rethinking their business operations, working on cashflows, and analyzing customers’ payment abilities with regards to the ongoing situation, maintaining liquidity is something businesses are facing trouble with due to the current, evolving situation. Companies are matching their expenditure with collections and monitoring the cash flow daily instead of forecasting it monthly due to the rising uncertainty in the market.
CFOs are making critical decisions to keep priority expenditures low and pushing it forward to secure liquidity for an extended period. For greater control over their financial position, companies have moved existing investments from liquid funds into overnight funds. Additionally, given the ongoing operational challenges with banks, companies are no longer counting undisbursed bank lines as an essential part of their liquidity pool.
CFOs need to explore solutions to expand their liquidity cushion to last at least 9-12 months, regularly examine revised cash reserve, review liquid assets, identify opportunities to make use of cash pools, and assess special assistance and support programs introduced by the government to keep businesses afloat during this crisis.
Financial risk management is another important area of concern for CFOs due to the high volatility in the financial markets. Because of the decline in US treasury yields, interest rate hedges are deemed to result in a high mark to market loss which organizations are finding it difficult to take into account. Hence, businesses need to adopt a ‘wait and watch policy’ and closely monitor fluctuating market dynamics across the world. Also, CFOs need to proactively engage with business teams to ensure that forecasts are accurate and create possibilities to renegotiate pricing terms.
The third aspect of importance is the assessment of funding requirements while also keeping in mind various potential difficult situations. Businesses will need to look into alternative solutions to maintain cash in the financial supply chain and also negotiating an extension for credit repayment. Many organizations have already started working with the banks to evaluate the possibility of adopting structured finance solutions. CFOs will need to monetize the current business assets to reduce the liquidity and credit risk on carrying debtors and inventory.
Some companies are utilizing discounting methods like dynamic discounting to provide support during these uncertain times and strengthen relationships with their vendors. Hence, businesses must continue monitoring their compliance, explore financing options for short-term liquidity, and avoid reputational risk by actively socializing with credit rating agency and banks. The three areas explored in this article will help companies in their immediate response planning and build a management system that can withstand such a crisis in the future.