Managing Cash Across The Supply Chain in Times of Crisis
Cash is always king, so an immediate plan must be put in place to conserve existing cash and look for new sources if possible. With over 80 percent of a company's costs and working capital tied up in the supply chain*, this must be the core area of focus.
The most pronounced impact to the financial health of companies since the outbreak of the Covid-19 pandemic has been the sudden decline in revenue. As their most readily available source of cash rapidly dries up, management need to look for other cash sources to trade through this lean period.
This article touches on eight key strategies that can be implemented now to preserve cash, protect EBITDA and stabilize the business for growth.
*Global Supply Chain Institute
1. Create a cost and cash war room as part of your stabilization efforts
PE investors should encourage their portfolio company management to establish a specific team focused on cost and cash management. This may include elements of the sales force responsible for leading the collection of receivables and senior management involvement in the renegotiation of payment terms both to suppliers and lessors of real estate and equipment.
2. Enhance visibility and control across the end-to-end supply chain using analytics
You cannot change what you cannot measure. Visibility and measurability of financial performance and position across the end-to-end supply chain is vital. Having accurate, immediate and actionable data in the current environment will be critical to inform prompt and appropriate decision making. Without this, executives will not have a correct understanding of how external factors, and their own decisions, impact the supply chain.
3. Substantially reduce indirect spending
Spend on marketing, professional services, IT, recruitment, utilities, MRO, plant, machinery and fleet management should and could all be reduced in line with the reduction in customer demand and business activity. Where possible, this reduction in costs should be done in a way that can be re-initiated as normal business activity resumes.
4. Reduce non-essential staffing but prepare for a demand recovery at the appropriate time
There are a number of measures that can be taken to rapidly reduce the cost of idle workforces. These include the furlough of workers and/or the reduction of compensation packages and/or the delay of a part of compensation to such a time that cash balances are restored and revenues ramp back up. There may also be opportunity to transition full-time workers to part-time, part-time to contractor and contractors to zero hours or other low-cost ways of retaining access and availability with negligible cost in the event of low or no utilization.
Where long-term negative impacts are likely, redundancies will also need to be implemented to right-size companies for the path ahead.
5. Delay non-essential capital spending
Swift analysis of ongoing and planned capital spending will be important in preserving levels of cash. This will require a risk adjusted appraisal of all planned and ongoing projects taking into account the position of the contractors and suppliers involved and understanding how alterations to the timing and scale of capex will impact the company in the short and medium term. Considerations will need to include the feasibility of the resumption of these projects should their out-put be required in the medium term.
6. Capture the significant raw material deflation opportunity that has emerged
The timing and combination of supply and demand coming back online may have a significant impact on inflation. For instance, in the event of a V-shape recovery, demand could ramp up far quicker than supply, leading to an inflationary environment where components or raw materials are scarce. Conversely, the current low-demand environment will lead to deflationary pressure on suppliers. Companies expecting to benefit from a swift resumption of demand may be well advised to take advantage of this now. In either scenario careful planning and analysis will need to come before action.
7. Focus on accounts payables and receivables
As mentioned above, the combined effect of pushing out payables (and/or reducing the overall liability through timely and advantageous renegotiation) and bringing forward receivables can have a pronounced effect upon cash flow. This, combined with swift reductions in inventory, overall reductions in direct and indirect expenditure and rationalization of planned capital spending, will put companies in a far stronger position going forward.
8. Identify new sources of liquidity
Putting in place -or drawing on existing - debt facilities, or introducing capital to the balance sheet through rights issues or the suspension of dividends are ways cash can rapidly be improved or preserved. Where companies have a material footprint, and depending on the timing and circumstances of leases, it may be possible to obtain substantial rent free or reduced rental terms, more advantageous terms around non-occupancy or non-utilization, as well as a reduction in financial liabilities in the area of dilapidations. Where the company has a significant pension scheme liability, it may be able to negotiate a suspension or break from contributions to preserve the financial stability of the company.
A three step roadmap forward: stabilize-recover-rebalance
The current pandemic is the latest in a series of global risk events which have exposed vulnerabilities in the supply chain. It's a sobering fact that every PE investor and portfolio company executive will now need to relook at their supply chain and recalibrate it to mitigate risk, drive EBITDA, cash & growth.
Built on a roadmap of three key stages; stabilize-recover-rebalance, Maine Pointe's Total Value Optimization (TVO)TM approach provides an accelerated pathway to overcoming the short-term challenges and building the foundations for a resilient, agile, digitally enabled supply chain of the future.
Find out more about our TVO approach to supply chain risk management.
About Maine Pointe
Maine Pointe, a member of the SGS Group, is a global supply chain and operations consulting firm trusted by many chief executives and private equity firms to drive compelling economic returns for their companies. We achieve this by delivering accelerated, sustainable improvements in EBITDA, cash and growth across their procurement, logistics, operations and data analytics. Our hands-on implementation experts work with executives and their teams to rapidly break through functional silos and transform the plan-buy-make-move-fulfill digital supply chain to deliver the greatest value to customers and stakeholders at the lowest and cost and risk to business. We call this Total Value Optimization (TVO)™.
Maine Pointe's engagements are results-driven and deliver between 4:1-8:1 ROI. We are so confident in our work and our processes that we provide a unique 100% guarantee of engagement fees based on annualized savings. www.mainepointe.com