Show Me the Money: COVID-19 and Cash Collections

The COVID-19 pandemic has taken the world by surprise. In attempts to contain and delay the spread of COVID-19, governments have been implementing legislation, quarantine and social distancing measures. Restrictions on daily life have become normal. Even as we now emerge from lockdown, the pandemic and the restrictions that were implemented to protect our public health systems, have caused incredible challenges for all businesses, regardless of size. Perhaps the most immediate of these is now managing cash flow.

It is worth pointing out that business failure associated with inadequate cash flow is not uncommon, even in better economic times. However, poor cash management issues rarely cause the sudden, dramatic collapse of a business, but rather they can give rise to a gradual downward spiral. The effects of this crisis are different. Accordingly, urgent contingency planning by businesses is required if they are to combat the economic consequences of the pandemic. We propose certain measures to be taken to ensure the survival for businesses severely affected by COVID-19 and a recommended plan of action here

What is cash flow?

Even during normal business conditions, sales need to be turned into cash and not left as a credit. Invariably, business tends to focus on profit and loss – growing the top line while managing the bottom line. What are perceived as more routine back office activities like collections and paying bills are often taken for granted.

Cash flow can be forecast by studying a business’ cash in-flows e.g. sales of goods or services, loans, interest paid, rent receivable etc. The timing of expected payments can be effectively analysed, for example outgoings related to suppliers, staff wages, capital expenditure, interest or loan repayments, tax and other liabilities. Where receipts lag behind payments, it creates a cash shortfall.

Top tips for good cash flow maintenance

Given the importance of cash flow in times like these, good businesses simply must build in cash management as part of their overall business risk and continuity planning. Here are some of the basic considerations to safeguard and possibly enhance your cash flow:

• Get the basics right, such as timely and accurate invoicing when goods/services are supplied and know who exactly to chase for payment. Make sure there are no disputes about supply

• Manage and expedite payment of money owed to you. Be pro-active about collecting upon sales made, knowing that many customers may be seeking credit extensions too

• Reduce credit given (and where possible increase cash sales) and make sure any new terms given are appropriate – be especially wary of the credit-worthiness of new customers in this crisis

• Seek to obtain more favourable credit terms/debt repayment periods from your own suppliers

• Reduce your own expenses, delaying discretionary spend, and where you have the cash to pay your suppliers, seek to leverage any further resulting discounts for prompt payment

• Assess factoring or discount facilities to accelerate cash receipts

• Identify bad and doubtful debts very early in the cycle and take appropriate escalation action

The above recommendations will be included in any good Credit Policy in any event.

Specific COVID- 19 cash flow considerations

Thankfully, we are now beginning to emerge out of the lockdown phase of the COVID-19 crisis. In order for businesses to survive, they must manage their cash flow to fit the current environment. Businesses should critically assess the impact of the crisis and any restrictions, under these key areas:

• Volume of sales

• Creditworthiness of customers and implications for collections

• Supply chain of the business and risk assessments to continuity of supply – consider alternate suppliers

• Staff costs and skills risks – can payroll be managed as government supports are withdrawn and can key personnel work continue to remotely, if necessary?

Inevitably though, businesses will face both continued interruption and suffer the effect of widespread market volatility. Public health requirements and in particular, social distancing may mean lower turnover, but with greater costs, for many businesses. These factors will present significant credit risk. To that end, with cash flow in mind, businesses should:

1. Revisit existing collection strategies to ensure they fit the post-COVID environment, as customer risk profile will invariably have increased. This will mean shortening the time between all of a business’ escalation points, for example, stopping supply, reclaiming stock (under a Retention of Title right), or engaging a third party collection agency or solicitor to demand monies owed – where terms are breached.

2. Where necessary, continue to talk to their bank: It may be prudent to seek liquidity measures such as revolving credit facilities; overdrafts; receivables financing or other agreed forbearance.

3. Avail of any applicable supports available from the Government. As well as commitments made to business by Revenue that will aid cash flow, there are a number of specific COVID-19 initiatives that may assist working capital/cash flow, including:

   1. The Credit Guarantee Scheme that supports loans up to €1 million for periods up to 7 years

   2. Microfinance Ireland COVID-19 loans, of up to €50,000

   3. Strategic Banking Corporation of Ireland Working Capital Loan Scheme, offering loans from €25,000 up to €1.5 million
      
      Businesses in certain sectors may be able to avail of other government COVID-19 supports, such as the Temporary Wage Subsidy Scheme, etc., for longer.

4. Check the terms of your insurance cover and make any necessary claims.

5. Seek advice from your Local Enterprise Office, and appropriate professional advice from your accountant or solicitor.

Conclusion

The disruption and uncertainty caused by the speed of the spread of COVID-19 virus has been unprecedented. The government imposed lockdowns to protect public health systems have led to massive unemployment and shrinking of national economies. The IMF forecasts that as a result of the pandemic, the global economy is projected to contract sharply by 3 percent in 2020, much worse than during the 2008–09 financial crisis. That organisation expects Ireland’s GDP to shrink by 6.8%, in 2020.

Any business that believes COVID-19 is going to have a significant impact on its cash flow must now move to gain visibility and control over its cash flows and working capital. It should adhere to good cash flow principles like those described in this article. It should also investigate and claim all available supports and engage with stakeholders like its Bank/lender or the Government’s Department of Business, Enterprise and Innovation.

Every business should put in place a contingency plan for the new reality of business during the crisis, in the expectation that such a plan will have to be revised and tweaked, as we emerge from lockdown and a new credit and cash flow situation unfold.

For more information and expert guidance in navigating these challenging issues, contact a member of our Dispute Resolution or Debt Recovery teams.

The content of this article is provided for information purposes only and does not constitute legal or other advice.