There has to be an optimal mix of strategy for sheer survival and ambitious growth in these unusual times of lockdowns, demand collapse and destroyed cash flows. Here is a brief overview of what is on the mind of the CFO as they help their businesses navigate this crisis.
By Mohit Bhasin
We are now in Lockdown 4.0. For many businesses in the non-essential category, this translates to more than two months of revenue loss. Though businesses in the essential category have continued to generate revenues, a general dip in revenues coupled with reduced productivity resulting from the more recent employee and product safety regulations have put margins under significant pressure. Consequently, as the profit and loss (P&L) of businesses throughout the country is severely impacted by the pandemic, the role of the CFO becomes all the more critical in driving corrective actions to limit damage while supporting business continuity initiatives to kick start operations.
With a goal to minimise the adverse impact to profitability and operating cash flows, the CFO could take the following key actions:
- Zero-based budgets: In the present market scenario, there is a significant disparity between the established cost base and gross margins. Zero based budgeting can help in identifying this imbalance and generating decisions that address the fixed and variable cost structure. Processes should be looked at minutely to identify efficiency drivers and reduce waste. Efficient planning of work shifts and factory work days can also help in managing costs.
- Temporary base pay reductions: As people cost is a significant component of any cost structure, reasonable temporary salary reductions should be discussed with employees to provide immediate cash flow relief to the business.
- Contractual price adjustments: Customer contracts should be reviewed to take advantage of any volume driven price terms. In the event of customer volumes dropping below any agreed upon thresholds, contract terms requiring higher price points should be enforced where possible.
- Managed working capital: Levers to reduce Managed Working Capital should be reviewed. Possible measures include the collection of overdue receivables, negotiation of delayed payment terms with vendors, review of inventory to identify inventory build-up resulting from cancellation of confirmed customer orders and contractual avenues for recovery of the same from the customers, etc.
- Capital commitments: With free cash being a crucial commodity in the present scenario, any capital allocation should be thoroughly vetted before capital commitments are made. Capital commitments made towards capacity enhancement projects before lock-down should be reviewed to evaluate present need and where feasible deferment of such projects for the near term to conserve cash.
A right mix of capital allocation should be made between the survival and growth of an organisation. New business opportunities emerging in the present market scenario should be evaluated vis-à-vis marketing methods, service delivery models, new products, new technology requirements, target customers, strategic partnerships, etc. to deliver economic benefit to the organisation under the present market conditions.
- Financing cash flows: Businesses with loan repayment commitments should take advantage of moratoriums offered by financial institutions to ease cash flow pressures. Alternate means of finance should also be explored. Various trade finance products can also be evaluated to enhance working capital efficiency. Temporary working capital financing requirements should be negotiated where necessary.
- Engagement with vendor or partner ecosystem: Vendor partners are painstakingly developed over time and are an integral part of the business supply chain. Key partners should be actively engaged with and their survival should be supported wherever required in order to manage the business continuity risk. TReDS platform can also be utilised to enable a vendor ecosystem that will allow vendors to manage their working capital efficiently and in a cost effective manner.
- Internal controls: A tight vigil on the control environment should be maintained to ensure that pressures on profitability and cash flows do not result in complacencies and compromises in process controls.
- Employee engagement: Work from home condition and its unfortunate consequence of limited facetime has made positive engagement with the team even more crucial. Video conferencing tools like Zoom are a great help and should be used frequently to maintain face-to-face connectivity with the workforce.(The author is presently working as Chief Financial Officer at IL&FS Transportation Networks Ltd. A Chartered Accountant with over 24 experience in all core themes of finance and accounting of large manufacturing, sales and distribution businesses with extensive experience in multiple business sectors like automotive, pharma, financial services, power and infrastructure, Bhasin has worked across India, Singapore, China and United Kingdom)