The global economy is facing unprecedented challenges on account of the COVID-19 outbreak. The full-fledged impact on businesses and supply chains can be analysed when life (as we knew it previously) eventually returns to normalcy, and there are no more cases of the virus relapsing/ reappearing. However, one of the major challenges faced by business leaders in the short term would be managing their cash flows. Large companies have cash reserves to cover their expenses during a downturn, while small and medium enterprises (SME) are more likely to face a cash crunch.

In the context of the UAE, in more than 80% of the instances, small businesses have failed due to cash flow issues. With collections already being a challenge for businesses in UAE over the past couple of years, the COVID-19 pandemic has created a further strain on cash flows for businesses, especially the SME sector that has limited access to finance. With the UAE government and central bank unveiling various stimulus packages, private companies such as Majid Al Futtaim and Nakheel introducing relief packages for their tenants and free zones also coming out with COVID-19 stimulus packages, some relief would be available for business owners for an intervening period. While the short-term outlook looks gloomy, business owners must be agile and focus on managing their cash flows to survive this pandemic and emerge as a stronger business entity.

We highlight the following key steps to be undertaken for managing cash flows through these difficult times:

  1. Communicate: As a first step, communicate with your employees and other stakeholders (including shareholders and banks) and keep them updated about the situation within the company including the likely challenges. The key aspects such as focus on cash flows rather than profitability, better inventory management, expediting receivables and exploring alternate supply chain channels (to ensure business continuity) needs to be communicated to the operational team. It becomes imperative that each employee focuses on improving their department’s cash flows, thereby enabling the company to manage its cash flows.
  2. Analyse: Identify and analyse fixed overheads and variable costs. While variable costs such as sales and marketing costs, utilities, events and promotions can be controlled and curtailed, depending on the business, fixed overheads such as rent and staff costs generally have limited scope for reduction.

a. Staff costs: While layoffs could appear to be an easier way to control staff costs, it would impact long term continuity, as employees are the key for many sectors, and on recovery, it might be difficult to recruit individuals with similar experience and expertise. Further, layoffs would result in gratuity commitments thereby creating liquidity crunch in the short term. Instead, business owners could explore paid/ unpaid leaves and temporary salary reductions to tide over these difficult times. Further, a freeze on recruitment activities and reviewing salary increment policies could be adopted to control costs in the medium term.

b. Rent: Many companies are likely to get relief by way of postponement of rent payments as announced by various free zones, mall operators and commercial developers. Others could look at negotiating directly with their landlords. Part waivers can also be looked at.

In addition to analysing costs, companies could also review their contracts to understand any financial implications under Force Majeure clauses. Further, companies which have business interruption insurance or other similar insurance policies that could be enforced, should look at the terms, conditions, coverage and the claim process.

  1. Strategize: Revisit the company’s business model and consider avenues to substitute/ enhance revenue from non-core/ non-traditional markets. For example, if the business is more reliant on exports which might currently be curtailed, look at avenues in the local market. In case there is an idle asset, look at monetising it (such as contract manufacturing for other competitors or sub-leasing machinery). On the cost side, review internal processes, negotiate with suppliers or identify alternate sourcing channels with lower costs, and identify scope for cost cutting, either by way of improving efficiency or by outsourcing some of the functions (such as logistics, warehousing, accounting and payroll). Outsourcing of non-core functions could also be viewed as a long-term solution to control costs. Reassessment of capital expenditure plans and postponement of non-critical investment to preserve cash is another avenue.
  2. Planning: Prepare short-term cash flow forecasts (preferably weekly/monthly) based on the current cash position, upcoming receivables (adjusted for probability of customer honouring payments) and expenses. To the extent possible, external financing options can be avoided. However, businesses should look at financing options by way of bills discounting and factoring. It might be prudent to run sensitivities and stress-test the cash flow forecasts taking into account worst case scenarios so that businesses are well prepared for varying potential outcomes. Reassess business continuity plans to ensure the company is prepared for such uncertain situations in the future.

While managing cash flows and adopting appropriate measures under various scenarios would be the need of the hour, companies need to keep an eye on opportunities that could be capitalised upon, either now or after the overall situation improves. As it is rightly said “an optimist sees the opportunity in every difficulty”, which means potentially diversifying into new businesses, adding new product lines to existing offerings or even exploring new geographies.

With our team of highly experienced professionals, PKF can help you with your requirements of preparing cash flow projections, debt restructuring, profit/ business improvement studies, diagnostic reviews, accounting and payroll processing. We would be happy to discuss any of your requirements. Please feel free to get in touch with us on difc@pkfuae.com.