In these circumstances, don’t assume the financing options you previously had available to you will continue to be available. Undertake scenario planning to better understand how much cash you’ll need and for how long. Use this opportunity to actively engage with your financing partners to ensure your available lines of credit remain available, and to explore new or additional options should you require them.

Cash flow management needs to be an integral element of a company’s overall COVID-19 risk assessment and action planning in the near term. Even for companies that have not yet been adversely affected, we recommend management teams with concerns about COVID-19 actively evaluate their cash flow requirements, develop appropriate actions under various scenarios, and assess potential risks in and to their customer base and supplier network.

Accounts Receivable

Companies tend to get lax about receivables when the economy is booming, interest rates are relatively low, and cash flow is not a concern. But, as supply chains are affected and managing cash flow becomes more important, it’s worth taking a hard look at how your receivables are being managed. In the point below, we mention the strategy of delaying payments to your suppliers; don’t be surprised if your customers are thinking about doing the same thing to you. That’s why it’s important to improve the rigor of your collection processes. Focus on customer-specific payment performance and identify companies that may be changing their payment practices. Also, get the basics right, such as timely and accurate invoicing. Any errors in your billing process can lead to costly delays in receiving payment.

Accounts Payable

One way to preserve working capital is to take longer to pay your suppliers. Some companies may unilaterally decide to delay their payments and force the extension on their suppliers, especially when stuck with inventory they can’t deliver into impacted margins. Of course, such an approach is likely to damage your supply relationships. Even worse, it might deprive supply chain partners of the cash they need to maintain their operations, which could lead to late deliveries and quality problems, never mind the added strain to supply relationships. We recommend working with suppliers to establish an agreement that both of you can live with. There might even be situations where you need to accelerate payables for a critical supplier that is on the brink of failure in order to preserve the integrity of your supply chain and prevent a critical disruption.

Audit payables and receivables transactions

Make sure you’re paying the right amount for the goods and services you procure and collecting the right amount for goods and services you sell. Also, if you have the cash flow to support it, make sure you’re taking full advantage of all available discounts. On the receivables side, look for situations where unearned discounts were applied and then aggressively pursue the proper payment.

Consider alternate financing options

Depending on what your cash flow scenario planning reveals, you may also need to consider tactics to generate faster cash flow from your receivables. Aggressive techniques such as factoring your receivables, although relatively expensive, may be your best option to improve cash flow quickly. You may also consider working with your customers to offer dynamic discounting solutions for those that are able to pay more quickly (for example, discount terms can be defined in advance, and the customer calculates the appropriate discount based on a defined payment schedule). With this technique, you are essentially paying customers to provide you with short-term financing. But the cost may be substantial: a conventional “2% net 10” early payment discount translates into a 36% APR. However, if government loans or bank credits are not available, this might be one of your only options.

Revisit your variable costs

In times of uncertainty, it’s generally a good idea to swap fixed costs for variable costs wherever you can–preserving your core business while increasing your flexibility on the fringes. Reducing your variable costs is often a quicker way to immediately reduce your cash outflows than focusing on your fixed costs. Of course, there are the typical variable cost-reduction levers, such as imposing travel bans and non-essential meeting restrictions (which might already be in place as a way to manage employee safety), imposing hiring freezes, and placing restrictions on discretionary spend like entertainment and training. When labor is a significant cost line in your business, consider avenues that might help reduce spend to avoid getting to a situation where layoffs are required. For example, look for opportunities to reduce contract labor and re-distribute work to your permanent workforce. Encourage employees to take available leave balances to reduce liabilities on the balance sheet. And, if necessary, consider offering voluntary, or even involuntary, leave without pay to preserve cash.

Companies should understand existing business insurance policies and the coverage they have in the event of a significant business disruption. Such insurance generally covers losses arising from disruptions to a business’s customers or suppliers. However, the breadth of coverage can vary significantly by insurer policy, industry sector, and geography. In addition, due to the insurance losses from the SARS epidemic, some insurers have included specific exclusions for losses arising from epidemics and pandemics, which you’ll need to understand if this is the case in your policy.

Leverage all the new tax and employer benefits to conserve cash and receive tax credits for employees who are on sick/medical/family leave. In addition to the forgivable loans available to businesses, the CARES Act provides many significant tax and unemployment benefits that will help businesses and their employees during the crisis.