Before we were able to find our bearings in the consequences of the spring (2020) coronavirus crisis, its second wave was coming, and with it, uncertainty arose again as to how the economic situation would develop. In recent months, we have discussed the causality of the (COVID-19) crisis and the handling of financial management in consultation with many directors of companies. Manufacturing, trading, and service companies were represented. We can therefore provide you with lessons learnt from the current cash flow crisis. Many inspiring conclusions emerged from the discussions, which we summarized in the following ten points. 

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Lesson No. 1 Financing through the right mix of own and external resources 

The big issue in company financing is the level of indebtedness. We wrote about this in the article Cash flow and the company’s debt ratio. Although it is sensible to use leveraged bank credits to optimize the cost of capital, over-indebtedness leads to financial difficulties in times of crisis. Conscious managers are therefore beginning to systematically address indicators of financial independence, debt sustainability and average debt repayment times. 

No. 2 Paying attention to the company’s key financial partners 

The most important point for maintaining the operation of the company in the period of greatest uncertainty is to ensure sufficient funds to cover the company’s liabilities. Don’t forget the possibility of postponing credit repayments, increasing operating financing, negotiating with suppliers and also institutions about the possibility of later payment or payment schedule of liabilities. It is necessary to remember the constant communication with banks and other creditors, with suppliers and customers, but also with state institutions, especially the financial administration. 

No. 3 Better investment planning 

Many companies responded to the crisis by postponing or cancelling planned investments. Since investments are important not only for keeping the company running smoothly, but also for keeping it functioning and keeping up with the competition in the future, it is advisable to focus on investment planning more systematically. Investing really doesn’t just mean spending in good times. We wrote how to approach investments in the article Keep your business investments under control

No. 4 Adjusting managerial strategic goals  

It is clear that the current situation is bringing about an economic downturn. However, for many managers, its consequences do not just mean waiting for better times. This crisis can bring about permanent systemic changes and other economic principles. It is therefore necessary not to miss the boat and to prepare effectively for the future. There is a reassessment of partial goals such as achieving a certain amount of economic results, EBITDA or added value towards combined indicators linked to the operating cash flow and the future value of the company. 

No. 5 Free Cash Flow 

Haven’t you been following the Free Cash Flow (FCF) indicator? Free Cash Flow represents the amount of cash that can be withdrawn from the company without jeopardizing its operation. In other words, this is how much money the company has left after it sells its products, pays for the production and administration costs, and incurs investment costs. Managers are now thinking more about how their company makes money and creates value. It is often necessary to modify the existing business model. 

No. 6 Preparing preventive measures 

If the company’s management has modified the strategic goals, then it must also translate the adopted strategy into actionable measures. If the crisis has already affected the company, activating crisis plans makes it easier to minimise the effects of adverse developments. The prevention includes an early warning system with appropriately set controlling indicators within reporting. Although the suspension of projects, downsizing or the dismissal of people can be very painful, the implementation of preventive measures helps restart the company and move it in the right direction.  

No. 7 Creating critical scenarios 

Those who plan are also in control. Those not in control are controlled. Circumstances cannot be changed, but for the success of the company, it is necessary to monitor and evaluate its activities in the business and financial plan and the cash flow development plan. It is essential for managers to have an overview of the possible development of the economic and cash situation in several variants using scenarios and sensitivity analyses. Thanks to alternative crisis financial plans, managers can monitor and manage the situation. We also touched on the creation of scenarios in the e-book How to start with cash flow planning

No. 8 Accelerating the frequency of forecast updates

One of the important lessons is the introduction of regularly updated outlooks. It is timely information about the future development of the company and its surroundings if the basic prerequisites change. This will allow managers to react much earlier than the real results are confirmed or not confirmed. The coronavirus pandemic is an incentive for directors not only to create reserves, but also to focus on automating processes and strengthening cash flow management tools. Cash flow management with documents prepared only in Excel lacks an extremely important feature in a crisis. And that is speed.  

No. 9 Systematic risk management 

The crisis has also brought about changes in the perception of risk management. The crisis has taught managers about the importance of managing risks systematically in all company activities. In crisis situations, the established risk management system is the most important process to quickly minimise future losses. It is useful to have a good idea of how much it will cost the company to resolve the crisis. Establish a separate internal contract for the duration of the crisis situation, where all costs related to the resolution of the crisis situation will be kept record of.  

No. 10 Proactivity instead of just waiting

Managers of contemporary companies are very well aware that the current crisis, as well as the financial crisis of 2008, cannot be survived without changing the current procedures. Crisis conditions require other than well-established behaviours. Continuing the current habits and just waiting for the recovery to come can be a very risky decision. It is very likely that business conditions will change as a result of the global crisis. Customers will change their expectations. Business partners will change their requirements. The position of suppliers will change. Simply put, what has been established so far may no longer be true. It is necessary to adapt in time. Use uncertain times to proactively evaluate the company’s activities and its further direction. 

💡 Do you know CAFLOU®? CAFLOU is a 100% digital management system which is used to manage the performance and economy of your company, team and projects, even remotely. 

📖 We have prepared useful e-books within the Caflou cash flow academy. You can see them on these links: 

•    💾 How to start with cash flow planning (e-book) 
•    💾 Action plan to handle cash flow in a crisis (e-book) 
•    💾 10 most common mistakes in cash flow management (e-book)

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Article author: Pavlina Vancurova, Ph.D. from  Padia

Ing. Pavlína Vančurová, Ph.D.

In cooperation with Pavlina Vancurova, Ph.D., specialist in business economics from consulting firm PADIA, we have prepared the Caflou cash flow academy for you, the aim of which is to help you expand your knowledge in the field of cash flow management in small and medium-sized companies.

In her practice, Pavlina provides economic advice in the area of financial management and setting up controlling in companies of various fields and sizes. In 2011, she co-founded the consulting company PADIA, where she works as a trainer and interim financial director for a number of clients. She also draws on her experience as the executive director of an international consulting firm. She worked as a university teacher and is the author of a number of professional publications.