How businesses will survive the Coronavirus: The CFO and treasury perspective

CFO and Treasury Perspective

The publication of several surveys coincided with the beginning of the Spring Quarter, and some of their findings show that finance executives are now expecting a longer period of recovery from the COVID-19 outbreak than was originally anticipated. 

The government stimulus packages unveiled in recent days and weeks are yet to quell the uncertainty that continues to arrest the global economy. And, as those in senior management struggle to quantify just how profound an impact the pandemic will ultimately have on their business, they have adjusted their outlook accordingly. 

C-suite sentiment 

This adjustment is reflected in the stark change of sentiment between the release of the first and second installments of PWC’s CFO survey. 

As recently as March 11th, 54% of those surveyed said they were concerned that the Coronavirus would have a serious impact on their business, but that number has since risen to 87%. 

Their most pressing worry remains the potential for a worldwide recession. The prospect of financial repercussions, including the effect on capital and liquidity, is still the No.2 concern, though it made a sharp jump from 48 to 64%. 

Unsurprisingly, 80% of respondents now expect their revenue and/or profits to decrease this year, which seems far more reasonable than the initial 58%. 

Further Reading

Taking Action 

And yet, 76% said that if the outbreak was to abruptly end, their companies could resume regular operations within three months, but that still represents a 14% drop from the original results. 

Other findings demonstrate how imperative cash management and conservation has become over the last month. Just under 70% have already moved towards curtailing cost, while 58% have either delayed or mothballed planned investments. 

Additionally, when asked what financial actions their companies are contemplating, in each case, 64% said they were considering cost containment or the deferral or cancellation of planned investments. 

Liquidity, Liquidity, Liquidity

Leo van der Tas, EY’s IFRS Services Leader, said companies, even in a situation that is evolving daily, will have to discern if they have sufficient cash resources to remain intact for up to a year.

“Understandably, management affected by the crisis will be concerned about the survival of their organizations.  And the key will be cash flow – does the business have enough cash to survive the next six to 12 months?”

Writing about the effects the COVID-19 outbreak may have on financial reporting, Van der Tas also stressed the importance of revealing uncertainties in any presentation of a company’s capacity to endure in the short-term.

Courtesy of EY

“When preparing financial statements, management has to make an assessment of a company’s ability to continue as a going concern, and whether the going concern assumption is appropriate,” he explained.

“In the current circumstances, management will need to consider the existing and anticipated effects of the coronavirus outbreak on activities in its assessment.

“Given the unpredictability of the potential impact, there may be material uncertainties that cast doubt on the company’s ability to operate under the going concern basis. If the company, nevertheless, prepares the financial statements under this assumption, it must disclose these uncertainties,” Van der Tas concluded.

Rolling three-month forecast

An accurate and adaptable forecasting process, however, will certainly help minimize those uncertainties. 

Deloitte have already cited the potential need to amend cash flow forecasts and assumptions, while Keith Lynch, from Treasury Services in KPMG, suggested businesses immediately implement a rolling three-month cash flow forecast.

This time horizon, which is also known as the 13-week cash flow forecasting model, is one we’ve previously discussed at great length.

Now ubiquitous across the corporate landscape, it guarantees a near-perfect balance between range and accuracy and satisfies the requirements of multiple stakeholders, who Lynch said must be engaged with frequently during this period.

“It is important to have a robust liquidity planning process in place for an organization to understand its cash position. To have full visibility in the short-term, we recommend a three-month rolling forecast, with actual versus forecast variance analysis.

“This can be conducted on a daily and weekly basis. There should be regular dialogue with internal stakeholders to ensure any changes to projected cash flow is understood and reflected,” he said.

Further Response 

EY (see image above) segmented their recommended response to the coronavirus into four pivotal areas. For treasurers, the message was quite simple and echoed much of what Keith Lynch urged. Cash must be controlled, forecasts require frequent and detailed scenario analysis, and liquidity is to be maximized and preserved.

CashAnalytics is a dedicated cash management and liquidity reporting cloud-based platform. Customizable and scalable, our treasury tool provides complex multinationals with real-time, group-wide visibility over their current cash positions and future cash requirements.