Chapter 2 Liquidity in a post-pandemic world

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Liquidity in a post-pandemic world

Conserving cash during COVID-19

One of the most serious economic consequences of the pandemic, which was experienced by most if not all businesses, was the increased pressure on finances. Particularly on working capital.

In our survey¹ with 205 corporate leaders, 60 per cent of C-level executives spoke of the challenges in getting financing support from traditional channels. They told us they need stronger liquidity support from their critical suppliers.

Meanwhile, 39 per cent of them are facing delayed payments from customers, which puts their very survival in jeopardy and makes planning for growth feel like a luxury. And the first step, of course, has to be fixing fundamental problems to ensure the business remains viable.

¹Survey commissioned by Standard Chartered in June 2020 and completed by 205 corporates (annual revenue USD100m-500m) based in Mainland China, Hong Kong, Singapore, Malaysia and India

Swift action needed to tackle financial and regulatory challenges

Our survey respondents also cited the challenge of keeping up with regulatory developments. Complying with complex applications for financial assistance has only added to their burden.

These challenges are not uncommon but, coming hot on the heels of unprecedented global disruption, their effects become amplified. To overcome them, businesses need to build and swiftly put into action comprehensive and well-defined plans.

Figure 1

Major financial and regulatory challenges faced by corporates

Source: Survey commissioned by Standard Chartered as mentioned in footnote 1

Mounting an effective response to immediate challenges – three key actions

Figure 2

Key actions considered by corporates

Which of the following steps have you implemented recently or plan to deploy over the coming months to improve working capital and access to cash flows?

First action

Four-step plan to manage and protect cash

Follow the money
Quite literally, it’s time to follow the money. Where is the organisation’s cash located, and what currency is it in? How available is it? It is vital for corporates to have a comprehensive, data-driven view of their cash conversion cycle and its relationship to their supply chains.

Take the shorter-term view
It’s also time for corporates to update their cash flow forecasts. Incorporate shorter cycles of 13 weeks and plan for multiple ‘worst-case scenario’ options. In periods of uncertainty, recognising what might trigger a crisis of cash flow or liquidity will help them plan better for contingencies.

Free up cash
Seek out ways to turn stock assets into cash – flash sales or targeting new customer segments may help. Maintain a buffer of stock, but accelerate inventory flows. The following may also be useful: adopt daily/weekly forecasting; prioritise critical products and supplies; scrutinise new purchases.

Focus on compliance
Keep abreast of changing regulations, reporting requirements and legal obligations. This will help to avoid any costly legal disputes, litigation, fines and other penalties. Now is the time to engage with regulatory bodies and plan for any upcoming changes.

Q: In order to improve your cash flow and manage your working capital in the midst of the pandemic, which of these solutions did you explore and find most helpful?

Freeing up my cash and liquidating illiquid assets
Negotiating payment terms or discounts with suppliers and customers
Using cash management solutions provided by my bank
Hedging my FX risks
Tapping into government financial assistance
Adopting scenario-based cash flow forecasting

Second action

Engage with customers and suppliers

Faster payments
All businesses would like to be paid fast. But that need is more pressing than ever. Corporates need to talk to customers and take steps to reduce how long they take to process payments. They may need to engage with multiple stakeholders inside customers’ organisations such as finance and procurement, as well as the department they actively sell in to. Some of the options that could be explored include revised payment terms; discounts for early payments; digital invoicing and e-transfers.

Manage outgoings
Talk to suppliers about relaxed payment schedules. But take care not to harm any key relationships. A useful starting point would be to prioritise suppliers based on the strength of the relationship and the relative importance of the material or service they provide.

Here are three potential options to consider:

Negotiating repayment terms or extending current credit lines with existing and new suppliers.
Amending contract clauses in current supply contracts, such as cancellation or service suspension clauses.
Exploring longer-term contracts with select suppliers to obtain bulk discounts while offering continuity of business in exchange.

Case example

Chinese suppliers and customers coming together during COVID-19

Third action

Make the most of external financing sources

Explore banking solutions
On top of building and maintaining strong relationships with their banking and financial services partners, corporates could consider some of the following:

Receivables financing, or invoice financing, to help with current and immediate cash needs. This could be especially useful for businesses with customers in overseas markets.
Foreign exchange hedging solutions to protect against losses arising from exchange rate fluctuations.
Supply chain solutions that cover the end-to-end financial flows of supply chains. These can boost visibility and strengthen relationships with business partners.

Access government financial assistance
Many governments and industry associations are working hard to provide help and support, so find out what’s available. The range of options organisations could benefit from may include: grants and loans; rental freezes, reliefs or rebates; salary subsidies and job support schemes.

Read about Standard Chartered’s collaboration with SAP Ariba to help companies seamlessly manage their supply chain finance needs with the digital platform here

Case example

Sri Lanka-based apparel manufacturer switches gear to produce medical clothing with support from Standard Chartered

Managing working capital along the resilient growth journey

As companies start to prepare for growth, they should consider actions that will improve their cash position in the longer-term. That can include options such as changing office and manufacturing locations or investing in digital technologies to deliver cost efficiencies. There should also be room for additional sources of capital and liquidity to help strengthen the overall position of the business going forward.

References:

PwC, ‘COVID-19: Finance and liquidity - Managing cash pressures due to coronavirus disruptions’
PwC, ‘Measures to mitigate the impact of coronavirus - Optimisation of working capital’
Standard Chartered, ‘We’ve joined forces with SAP Ariba to bring financial supply chain solutions to the world’s largest digital business network’, August 2019
Standard Chartered, ‘We’ve completed our first joint transaction on blockchain platform with Linklogis’, August 2109
Treasury & Risk, ‘Strengthen Your Cash Position in the Covid-19 Crisis’, May 2020
Oberlo, ‘5 Steps Business Owners Can Take Now to Improve Cash Flow During COVID’, May 2020
EuroFinance, ‘Managing treasury through the Covid-19 crisis’, April 2020
The Asset, ‘Covid-19, trade war uncertainties spark supply chain innovation’, March 2020