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Manage the impact on Working Capital

Manage the impact on Working Capital

Since the first reports of the appearance of COVID-19 in China reached us at the end of last year, the situation has escalated quickly to a global level. Today, the impact of this new viral disease is widespread and can no longer be avoided.

In an attempt to contain the spread of the virus, the Belgian government has announced several drastic measures. Many other countries have also issued either negative traveling advice for their residents, discouraging foreign travel or have prohibited their residents from travelling to other countries altogether. Aside from these government-imposed measures, it is the responsibility of each and every one of us to do everything in our power to protect public health and to apply physical distancing measures.

It is important that every Belgian company takes some time to reflect on the impact of COVID-19 on their organization. Not only should the impact of COVID-19 on the companies’ employees, fiscal, legal, and tax implications be reflected upon, the organization should also be aware of the going-concern risk that they may eventually face the coming days/weeks/months when running out of cash. Cash and working capital management are important factors within this assessment.

Challenges

  • Will the company be able to collect their (outstanding) receivables and fulfil their suppliers’ conditions?
  • Will the company be able to monitor their payroll liabilities?
  • What about (un)expected (cash) expenses?
  • If cash-in flows are lower than cash-out flows, how long can we face this situation?
Domains Manage your capital

Which measures can we take to prevent further cash destruction?

A lot of companies don't have the luxury to worry about future implications, but are struggling to survive as we speak. Many are impacted by decreasing customer demand and disrupted supply chains. On short notice, fiscal and legal measures will have to be considered and applied to give the company the space and time to further deepen and improve their working capital position for the coming weeks and months.

Immediate actions

Businesses with extensive presence in - or direct ties to - affected areas must take immediate actions to assess organizational exposure, positioning them to appropriately support key stakeholders, employees, and customers.

 

Manage working capital risk

  • Create a response team to facilitate the open and consistent flow of accurate information between key stakeholders, maintaining stakeholder confidence and informing customers who will be impacted.
  • Establish a team to focus on credit collection and supply chain. This team will work to review contracts with key customers and suppliers to understand obligations and liabilities.
  • Determine business exposure by identifying current and buffer inventory, building tier-transparency and short-term action plans.

 

Safeguard people

  • Leverage HR expertise to maintain employees’ physical and mental wellbeing.
  • Develop a (back-up) plan for impacted staff that may include contingencies for more automation, remote working arrangements, or other flexible resourcing in response to personnel constraints.
  • Leverage available internal and external technology to aid collaboration and equip employees with necessary tools to work remotely both in affected areas and with individuals in affected areas as seamlessly as possible.

 

Tax implications

  • Pay attention to the corporate income tax and VAT consequences due to changing business income and expenses. Request a payment plan or apply for refunds if needed.

 

Legal implications

  • The fulfilment of contractual obligations might become strained. You may invoke “force majeure”.
  • Consider which actions are needed in terms of corporate law (such as the shareholders-meeting, annual report, and annual accounts).

Medium-to-long term actions

Beyond immediate actions, organizations should value the opportunity COVID-19 provides to reflect on the ability to navigate a crisis and going forward, consider actions to increase agility and become more resilient in the future.

Scenario planning: Organizations must act with imperative when developing and implementing enhanced risk management practices, focusing on the opportunities scenario planning offers in creating action plans. Scenarios enable organizations to see the bigger picture and make effective trade-off decisions. Simulations can be run swiftly to identify rapid “low hanging fruit” opportunities. By further analyzing past events and hypothesizing future threats, organizations are able to identify strategic and concentrated customers and suppliers that are at risk.

Customer and supplier identification: Real-time customer and supplier data should be monitored, assessed and reviewed, to be able to manage the customers and suppliers at risk. Ensure communications are made with principal stakeholders, such that the performance is not affected and terms and conditions are guaranteed and followed. Identify the legal consequences and risks that may arise from doubtful debtors or suppliers.

Review impact on business operations and processes: Review and assess what impact an event will have on your day-to-day operations. Not only will it impact your process, but workforce planning and process management will also have be monitored and critically reviewed. Do you have already a view on your automated/manual process?

End-to-end systems and reporting: A lot of opportunities and weaknesses are not identified if the operations, transactions and processes are too manually monitored. If the lead-time between the different steps are too high, this will result in a longer cash-conversion-cycle time. IT-systems should support you in enabling an end-to-end reporting experience to be able to track-and-trace from A to Z the whole process.

Create an agile and visible working capital framework: Working Capital Management is not only a financial term. Working Capital is measured through financial KPI’s, but if you want to improve those KPI’s, you will have to optimize the underlying process. It is an operational issue that impacts the income statement of your company and can be improved by 20-30% via process optimization. 

Improved and optimized operations and processes: These will result in an improved cash flow, cost reduction, an improved balance sheet position and your increased cash position will allow you to an improved funding position

As tomorrow’s disruption is surely already brewing, the business world should always be ready to adapt to constant changes.

What can help your company to face this crisis and prepare for other crises to come?

Working capital management is an important and powerful tool to prepare for and manage foreseen and unforeseen future events, including disasters such as the financial crisis of 2008 and the COVID-19 pandemic that companies are currently facing.

To say that companies could have been fully prepared for such an event sounds a little far-fetched, but nonetheless holds a certain level of truth. In the aftermath of the 2008 financial crisis (where companies faced similar liquidity challenges), working capital management arose and treasurers and credit controllers became a strategic partner for businesses. Companies who heavily invested in their working capital management and supporting tools back then, will be better prepared and more resilient when taking on the COVID-19 challenges of the present.

Preparing for any such changes requires in-depth knowledge of the company’s current financial situation, including an accurate up-to-date view on the day-to-day and future expected liquidity position.

If you don’t know how much liquidity you have right now, how would you ever be able to predict, prepare, and act upon changes in the future? This includes not only the amount of cash available, but also the location and the time required to access it. Companies therefore need to have clear insights into their financial statements, including cash balances, credit lines, covenants and outstanding receivables, payables and inventory levels.

Once these are available, predictions (based on data and planned transactions) can be made, including:

  • Daily/weekly/monthly evolutions in cash flow
  • Daily/weekly/monthly liquidity available
  • Future scenarios and their impact

 

The following overview outlines the different sub-processes for order-to-cash, forecast-to-fulfil and purchase-to-pay that your company needs to understand, as well as which measures and actions you can take to improve your working capital cycle. 

Order Cash 1
Order Cash 2
Forecast Fulfil 1
Forecast Fulfil 2
Purchase pay 1
Purchase pay 2
Legende

Which solutions may be critical to resolving the challenges companies are facing right now?

Disruptive challenges require hands-on, agile solutions, which support companies by providing access to immediate insights that help them to define and take appropriate actions.

Process mining is an approach which can automatically reconstruct the entire process (including sub-processes, tasks and events) to provide insights into the occurrence and location of process bottlenecks and inefficiencies. Process mining provides companies the opportunity to discover and implement (alternative) processes in a easy and quick manner. This to guarantee the same high quality to customers and suppliers in times when accessibility (of people, resources, tools, etc.) is challenging.

Manage your capital chart

The working capital analyzer is a dashboard tool which enables your company to analyze both the financial data (top-down approach via G/L transactions) and the operational data (bottom-up approach via invoice data) following the DAR methodology (dashboard, analyze, report). The main objective is to optimize the liquidity of a company to free up the necessary cash to survive the challenges of today. 

A top-down approach starts with the financial statement figures and G/L-transactions to calculate the KPI’s. A Bottom-up working capital analyzer follows the same DAR methodology, but also uses the operational data from the ERP system(s). The bottom-up approach serves the same goal as the top-down approach and helps you analyze your data in your organization, but based on operational information, down to the invoice and SKU level.

The cash flow forecaster is a tool which provides a company the opportunity to visualize the current and forecasted cash and liquidity position at any moment. The tool is combining (historical) financial and operational data retrieved automatically from the ERP system(s) and a set of predefined manual variables, which are tailored to the organization. These variables can be modified, giving the opportunity to predict the future outcomes of possible optimizations in the current way of working.

Forecast chart

Your advantages

  • Immediate implementation, compatible with all systems;
  • Accessible both remotely and on-premises;
  • Direct insights that add value in the short-term and for the future;
  • Solutions which are user-friendly and easy to further tailor to your needs.

Our recommendations

COVID-19 is disrupting the business world in such ways that companies are not only impacted today but will still feel the impact long afterwards. While some scenarios are impossible to predict, some companies have already proven that it is possible to be prepared for the worst, through working capital management, developing expertise, and having the right tools in place. 

Particularly important is to:

  • Determine the amount of available cash, its location and the time required to access and transfer this cash to wherever it’s needed;
  • Determine the forecasted short- and mid-term cash and liquidity requirements;
  • Determine the cash value of assets able to turn into cash on a short-term notice;
  • Determine the measures and tooling in place, their reliability and effectiveness.

By investing in your treasury and working capital process, you will enable your company to deal with this crisis and other crises to come.

Rob Steensels
Director

T: + 32 478 01 04 08
E: rsteensels@kpmg.com

Paul Malfeyt
Director

T: + 32 2 708 48 44
E: pmalfeyt@kpmg.com

Stijn Devesse
Manager

T: + 32 486 52 64 20 
E: sdevesse@kpmg.com

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