COVID-19: Finance and liquidity: PwC

Managing cash pressures due to coronavirus disruptions

US economic activity is slowing as millions practice social distancing to stem the spread of COVID-19 (coronavirus). As a result, companies are either currently experiencing or anticipating significant constraints on cash and working capital, including potential liquidity challenges.

Cash flow scrutiny will be crucial in the days and months ahead, as will the speed at which the $2 trillion US economic stabilization package that passed on March 27 starts to flow through the economy. Managing cash pressures often falls directly on finance departments during a crisis. Executives will balance these pressures against the prospects for relief, as details continue to unfold about the stabilization package’s significant tax provisions and other measures designed to assist individuals and businesses.

Depending on the industry, many companies will see lower revenue resulting in less cash flow, along with delayed receivables collection, as needs grow to step up payables to important suppliers. Companies should expect to become much more nimble in managing inventory given the uncertainty in the supply chain, which will also place demands on working capital.

This guidance is based on our experience helping companies manage their global cash and liquidity position during times of high uncertainty.

What to do now

Now is the time to test all your incoming and outgoing cash flows — modeling worst-case scenarios and downsides, including the impact of foreign exchange (FX) on the cash position — so that you can act in a measured way. What’s the status of your cash and liquidity runway today, and what do you anticipate it will be during the next 90 to 120 days?

1. Understand minimum cash and liquidity requirements.

An assessment of available cash and liquidity headroom is paramount. Identify how much cash you have globally and where it is located. Assess if it is restricted or readily available for use. Identify the key cash flows that may be exposed. Awareness of cash reserves or shortages, along with the liquidity position, will be a starting point for identifying opportunities to protect and improve your position.

2. Establish a robust short-term cash flow forecast and run multiple scenarios.

Model your cash needs for the next 3 to 6 months. A robust forecast identifies contraction trigger events and quantifies the impacts. Triggering events may include borrowing-base deterioration or a covenant breach. As a part of this exercise, determine whether your existing processes and tools can handle the demands to quickly quantify the impacts. If not, this is the time to make process improvements and look for opportunities to deploy digital solutions.

At the same time, explore different scenarios and what-if analyses, such as a drop in sales or a reduction in cash collected, and be prepared to revise them often. If you wait for the complete picture, you’ll be too late to steer the ship. Scenario planning gives management the confidence to make needed decisions and to shape communications about the response strategy.

3. Take actions to protect your position.

Once companies understand their financial position, it’s time to take action so they can (at a minimum) address liquidity and working capital requirements. This will typically involve assessing opportunities to identify the financial and operational levers that can be pulled to conserve and generate cash and potentially increase access to funding.

Bolster credit and collection capability.

Use analytics to target and prioritize working capital levers, such as offering customer discounts for earlier payment terms or reprioritizing customer cash collections.
Evaluate current processes to assess customer credit risk in the current environment and determine any required actions.

Control the flow of outgoing payments.

Consider ways to minimize non-essential outflows, such as discretionary spending, and defer capital expenditures.
Reassess payment priorities by reviewing vendor relationships to consider opportunities to hold or delay outflows.
Implement rapid cost reduction plans that will have a cash impact, such as bonus freezes.

Stem the flow and right-size inventory to sales.

Assess critical material needs and risks to manage supply options.
Recalibrate forecasts, replenishment triggers and targets to control production.
Challenge new orders. Adjust, cancel, redeploy where possible.

Deploy financial tactics.

Ensure lean cash principles are in place. Accelerate repatriation to reduce cash restricted or trapped in foreign subsidiaries or operations.
Consider using credit facilities, as needed.
Enable financing tactics and further leverage the balance sheet, such as supply chain financing solutions.

4. Stand up a central point of control, visibility and communications.

Companies can consider setting up a program management office (PMO) to help ensure consistency in managing the impact of COVID-19 and to rapidly respond to the range of operational and financial issues as they arise. Recognize that any crisis will disrupt the ways that cash moves across the enterprise and then prepare for it. In some cases, this may warrant a cash conservation office that controls expenditures.

5. Develop contingency plans for accounting operations workforce.

Accounting services need special consideration in an overall workforce action plan for COVID-19. It is crucial to maintain the ability to collect and pay invoices during a crisis. Some US companies have outsourced these activities, often to providers with workforces that are based in countries that are just beginning to feel the full dislocations of emergency health measures. Other companies manage accounting in-house locally or through a shared services model. What’s the plan if COVID-19 disruptions take your back office offline?

If your company’s accounting is primarily done:

In-house at multiple sites or through shared services. Determine where you need to increase or decrease front-and back-office staffing to meet remote work considerations (e.g., increased help desk/support resources, decreased on-site support resources). Some companies are currently testing whether they’re able to close the books and process transactions remotely with staff working from home.
Through outsourced services. Consider contingent worker and service provider readiness, including policies, capacity, remote access, cyber issues and technology access/readiness for contingent workers. Consider duty of care for contingent workers who may face health or safety risks in the workplace and potential liability for contingent workers who may expose other individuals to health risks. Some large services companies are currently providing “surge services” to temporarily support certain back-office activities for their customers or suppliers.

What to do next

Understand and plan for the financial reporting considerations that will result from COVID-19.

Are you ready for your stakeholders to ask about COVID-19? Some businesses have already begun to inform their stakeholders about their response to this virus. As events unfold, companies should consider the following as it relates to financial reporting:

Evaluate financial reporting requirements. Companies have found a bit of short-term deadline relief from the SEC. On March 25, the SEC issued an order giving public companies that are unable to meet filing deadlines due to COVID-19-related circumstances an additional 45 days to submit certain disclosure reports (e.g., Forms 10-K, 10-Q, 20-F) that would otherwise have been due between March 1 and July 1, 2020.

Even with this relief, companies should evaluate financial reporting needs and resources earlier than usual. This could include evaluating the impact of remote work arrangements and other staffing matters on the company’s financial reporting systems, including its internal controls over financial reporting and its disclosure controls and procedures. Additionally, companies should consider the need to engage valuation experts to assist in evaluating potential impairment of goodwill or other assets and estimating the fair value measurements of financial assets.

Assess internal and external audit needs. Management and audit teams should have contingency plans in place with both internal and external audit teams to ensure appropriate audit requirements can be met — both in the US and at foreign locations, which may have local statutory reporting requirements and/or may support the consolidated audit. Internal and external audit teams should consider the impact of remote working arrangements, as well as protocols that eliminate or minimize on-site visits or access to documents (e.g, physical inventory observations).

Analyze estimates and financial models. This crisis will continue to have broad effects on both the overall economy and many companies’ future plans. Companies that create financial models should consider if their models accurately reflect the company’s as well as the economy’s larger issues. In some cases, it may be beneficial to probability weight various scenarios rather than creating a single estimate. The need to foreshadow potential impairments within disclosures should be considered as well.

Consider the broader impact on public disclosures. Companies will need to continue to evaluate how COVID-19 impacts their disclosures in SEC filings, including whether disclosures are required within the financial statements or other areas within the filing, including the description of business section, risk factors, or management’s discussion and analysis (MD&A). On March 25, the staff of the SEC’s Division of Corporation Finance issued disclosure guidance that companies should consider, which includes guidance related to earnings releases and non-GAAP financial measures that adjust for the impacts of COVID-19.

Find our FAQ on the accounting implications of COVID-19, podcasts on the impact on CECL and fair value, and other thought leadership on our COVID-19 Accounting and Reporting Resource Center page.