Cash Management in the Time of COVID-19

March 27, 2020

In light of the COVID-19 pandemic, many businesses are facing a sudden cash crunch. With the broad shock to almost every sector of the economy, businesses will be facing challenges up and down the supply chain, from their customers, vendors and suppliers, banks, and the government. As credit and liquidity have evaporated, it is critical now more than ever for businesses to forecast their cash flow and manage their working capital. Through effective cash flow forecasting, businesses can anticipate the timing of future cash flow needs and take the best courses of action, including seeking outside financing or government support.

Although cash flow budgeting is a standard recurring process for many organizations, a liquidity crunch may require businesses to take a more meticulous approach. In addition, there is inherent uncertainty with forecasting, and now it may be necessary to use more conservative assumptions in order to prepare for a worst case scenario. Simply using historical trends may no longer be sufficient if the historical data does not account for the impact of the COVID-19 crisis. Cash collection, disbursement, and reserve are three of the fundamental cash management functions. Brief descriptions of these functions are provided below, along with examples of the impact of the COVID-19 crisis on each.

  1. The cash collection function involves accumulating and depositing cash receipts, as well as administering credit policies.
    • Collection of receivables may be stretched (i.e. increasing days sales outstanding) as clients and customers may be facing similar crunches.
    • Discounts may be used to encourage early payment or payment using methods that will result in faster check clearing.
    • The extent to which customer payments can be accepted electronically is important to consider.
    • Office closures and employee furloughs may result in delays in accessing financial records.
  2. The disbursement function refers to managing cash disbursements.
    • It may be necessary to forego certain early payment discounts if it means conserving cash for the short term.
    • Some suppliers may demand payment at point of sale.
    • Companies should consider the extent to which vendor payment timelines can be stretched out.
  3. The reserve function refers to the management of excess cash.
    • During the COVID-19 crisis, it could be wise for companies to increase cash reserves by drawing down on existing credit facilities, even if the business is not immediately impacted.
    • In order to maintain the desired amount of cash reserves, it may be necessary for business owners to forgo dividends or distributions for a period of time. For entities that pay tax distributions, the extension by the IRS of the tax filing/payment timeline is a factor to consider.

Given the uncertain nature of how the COVID-19 crisis is evolving, caution and conservatism is the best overall approach when looking at cash management functions. The cash forecast should be stress tested with input from multiple functional areas within the business to determine the timing and extent of potential cash shortage scenarios. The early warning will provide business owners and financial managers the ability to be proactive rather than reactive.

Many of our clients facing adversity in the current climate are worried about meeting financial and operational covenants. Lending institutions have heightened emphasis covenants during this time and may restrict revolver drawdowns or require detailed financial and cash flow projections that quantify the impact and extent of any declines in operating performance. It is critical to have the data readily available to manage and respond to these potential outcomes.

As the COVID-19 crisis continues to unfold in the coming weeks and months, organizations may look to make updates beyond near-term cash management considerations to longer-term forecasts and projections. This could be necessary for management’s internal purposes or in connection with potential outside investments or financing transactions.

If you need assistance with cash flow forecasts, preparation of prospective financial information, or other financial modeling support, our accounting specialists are available for consultation. Please contact Bill Foote, Jimmy Zhou, or Barry Rieger at 301.231.6200 for more information.