Covid-19 | Cash flow & working capital management

23 March 2020

The Covid-19 global pandemic and resulting economic environment will test businesses in Ireland and the rest of the world.

The Irish economy has already seen the impact of Covid-19 in many ways with:

Share prices plummeting;
Employees required to work remotely;
Unprecedented drop in demand within the travel & leisure sectors;
Reduction in retail traffic; and
Disruption to supply chains for many businesses.

Businesses must take immediate action in order to respond to these prevailing market conditions.

BDO recommends taking the following actions to manage your business through a crisis:

Understand your Cash flow

Understanding your current cash position, committed debt facilities and forecasted cash flows should be one of the key consideration for every business now:

Understand your current position and your weekly cash needs;
Prepare rolling weekly forecast cash flows, incorporating up to date assumptions regarding trading levels, and including sensitivities for further potential impacts on trade in the current environment
Calculate the cash headroom in the business through the forecast period from cash reserves and existing debt facilities
Determine if there is a risk of cash shortfalls and/or convent breaches in the weeks ahead that could impact your business.

Implement cost control measures

When trade is negatively impacted; managing profitability can be difficult for businesses and the implementation of certain cost control measures may be required:

Analyse fixed and variable expenditure;
Understand what costs you actually need to run the business;
Develop a cost strategy (e.g. rationalise operating costs, consider rent commitments review headcount, reduce Capex, limit discretionary expenditure etc.); and
Monitor any cost reduction initiatives taken.

Manage working capital

Businesses will need access to cash to fund ongoing operational needs and must consider the level of cash “locked-up” in working capital:

Manage the businesses cash conversion cycle (CCC = DIO + DSO – DPO);
Optimise the level of stock on hand where feasible, ensuring sufficient levels to meet expected demand but also that excess stock is not locking up cash;
Monitor debtors and continue to focus on cash collection – failure to collect debtors may result in cash flow shortfalls;
Evaluate tax payment obligations and supports available from Irish Revenue Authorities (See “Key Covid-19 Tax Measures");
Negotiate favourable terms with suppliers – keeping in mind their financial situation; and
Carefully consider the credit worthiness of customers and suppliers before extending credit.

Communicate with your Bank

Communicate early and often with your bank/ lender as they may be the fastest source of additional liquidity in the weeks ahead:

Communicate early to explain the situation – providing detailed weekly forecast cash flow information;
Proactively engage with your Bank, who can assist you through a moratorium on existing facilities and/ or potentially the provision of additional funding;
Be transparent; and
Identify alternative sources of capital and Government supports available to businesses.

BDO’s Corporate Finance team can assist businesses in preparing a rolling cash flow forecast, reviewing your cash conversion cycles and providing advice on the incremental funding options available during this time.

For more information, contact Rory O'Keeffe, Partner, BDO Transaction Services or Katharine Byrne, Partner, BDO Corporate Finance.

BDO’s Tax team can assist in discussions with the Irish Revenue Authorities in relation to the potential deferral of VAT and PAYE payment obligations.

For more information, contact Angela Fleming, Tax Partner.