Due to the current crisis brought about by corona, the international economy is facing a phenomenon that could not have previously been foreseen or accounted for in any typical business plan.
CFOs must now adapt and reorient their companies to the changed situation in times of corona. Suddenly, terms such as insolvency and/or over-indebtedness are also shifting back into focus. In this situation, proper liquidity management is essential to safeguard company liquidity in order to ensure a company’s success.
If issues surrounding liquidity occur, a company’s continued existence can hang in the balance. In the current corona crisis, the CFO must get a picture of how long the company will have sufficient cash flow in the given situation to meet its contractual obligations.
Measures for liquidity management
A company’s legal obligations for planning result in particular from the provisions of company law (general management obligations pursuant to Section 93 (1) of the German Stock Corporation Act and Section 43 of the Limited Liability Companies Act) as well as from the obligation to file for insolvency (Section 17 of the Insolvency Statute). Owing to these regulations, it is common practice to undertake direct short-term measures to safeguard liquidity and carry out liquidity planning (in the form of a so-called 13-week liquidity forecast). If the CFO and his treasury staff do not have the relevant experience and knowledge, there should be an attempt to seek assistance from the outside.
Step no. 1: Secure liquidity holdings
This form of planning serves as the basis for liquidity management. The first step is to analyze how the available cash and cash equivalents, such as undrawn credit lines or liquidity holdings in foreign subsidiaries can be secured in such a way that the CFO of the parent company can access them at any time.
Particular attention must be paid to so-called "trapped cash". An analysis needs to be made as to which holdings are located in which countries and under which circumstances they can be accessed, or which amounts are not available due to local regulations and are therefore not freely available (in this way, “trapped”).
The decisive factor in assessing this is whether cash pooling occurs within the Group and whether liquidity is freely available at all times. Since at least German insolvency law does not recognize a group insolvency, such short-term liquidity planning must be prepared for each legal entity in the Group in order to know when and where what liquidity shortfalls will occur.
Due to legal circumstances, situations may arise in which existing cash pools cannot be maintained during the corona crisis. Legal advice should be sought in any case in this regard. These cash assets at hand are compared with the creditors with issues due at the time of entry. The financial status of a company can be obtained this way.
Step no. 2: Assessment of liabilities due
The next step is to assess which of the civil liabilities due and falling due do in actual fact need to be paid in the current situation. Contracts with suppliers, lessors, and service providers need to be analyzed to see if they contain “force majeure” clauses, thereby opening up the possibility of the reneging of payment under the current circumstances in order to safeguard the liquidity of the company. Of these legal possibilities, a distinction can be made between not having to make payments due and making bilateral agreements with the above-mentioned contracting parties.
If deferrals/waivers are agreed with suppliers, lessors, etc., the corresponding payment obligations do not have to be considered as due in liquidity planning and lead to correspondingly lower payments in the period under review.
However, particularly in the case of deferrals, attention must be made that these payments are made at a later date. Direct debit mandates should generally be canceled in order to ensure better control over outgoing payments.
Step no. 3: Verifying the deposit side
The third step is to check on the deposit side whether the scheduled payments will really all be made according to their due dates. In the current corona crisis this has become all the more of a focus. It is also safe to assume that a company's own customers are also attempting to safeguard their own liquidity. This in turn will lead to delayed payments due to the extension of contractual payment periods. This can also lead to a company's own customers negotiating deferrals and waivers of some kind.
Depending on the customer portfolio, a significant increase in the default rate for receivables will have to be assumed. It should also be examined which deposits can be brought forward, if necessary, by granting customers special conditions if they pay early.
It is also essential for the CFO to analyze and implement measures for the immediate generation of liquidity in the company. These include, for example, a freeze on investments and expenditure for overheads, a reduction in inventories of goods and materials, claims of significant outstanding receivables, and renegotiations with suppliers to extend contractual payment terms.
In the current times brought on by corona, all kinds of state support, such as short-time work compensation, the reclaiming of already paid VAT payments, and the deferral of future tax/social security contributions must be taken into account, if these can be implemented in some way. If a shortfall in liquidity remains after all these points have been taken into account, it must be examined whether and to what extent shareholders and banks are able bridge the shortfall.
If they are not able to do so, preparations must be made as quickly as possible to take advantage of one of the government loan programs available.
Liquidity management and liquidity planning after corona
The question still remains how things will continue after the acute end of the corona crisis. How will the markets develop and what influence does this have on the business model of the respective company? All deferrals and additional financing that are now being drawn down, irrespective of whether or not they are guaranteed by the state, will have to be made good on or reduced in the coming years.
Since this question is difficult to predict for most business models owing to current uncertainty, a so-called "contingency plan" is to be drawn up. Several conceivable scenarios must be planned in order to be prepared for any kind of eventuality.
Financial planning certainty in uncertain times
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