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A laser-like focus on the fine detail of cash management will be the order of the day for retailers plotting their path to recovery during 2021. This will be critically important for relationships with banks, suppliers and other partners as the sector rebuilds following the massive disruption wrought by the COVID-19 pandemic.

“Cash is king,” says Andrew O’Leary, lead director with KPMG Ireland’s Working Capital Management team. “Companies in the retail sector must develop a cash culture and the must make cash management a boardroom priority. 2020 has shown us the benefit of that.”

The COVID impact

The early days of the pandemic saw retailers scrambling to stay afloat. “Many retailers took fairly drastic steps such as withholding rent, temporary staff lay-offs, salary cuts and so on,” he notes.

Retailers were assisted with supports such as the deferral of rates and Revenue liabilities and the Wage Subsidy Schemes as growing numbers of them gradually adjusted to new ways of selling. But that brought its own challenges.

“We saw huge demand for logistics properties in the sector,” says O’Leary. “Some retailers had to take on the cost of additional warehouse rents to support online sales while having to deal with their existing rents. We did see turnover rents being agreed in many instances but the pressure is coming back on to return to standard rents. And the opening and closing of non-essential retail made life very difficult by disrupting working capital cycles and throwing up quite severe cash flow challenges.”

Cash flow forecasting

Accurate cash flow forecasting is going to be critically important in the period ahead, according to KPMG Ireland Head of Debt Advisory Hazel Cryan. “When you look at it through a banking lens, the banks require very detailed forecasts to make a realistic assessment of a retailer’s liquidity needs,” she explains. “Even quarterly forecasts can mask pinch points. You need monthly or even daily forecasts if the business is distressed. That high frequency is worth it because it allows the bank to see where the money is coming from.”

Realism is vital. “Businesses have to work with the banks to get to a solution that works for everyone and that means having realistic projections. The banks understand that it’s not easy to forecast at the moment but if you are repeatedly going back looking for more that’s going to fracture the relationship.”

Granularity and fine detail are also important. “If you have a figure for cash out of €2 million that’s not good enough, you need details on exactly where it’s going,” says Cryan. “There needs to be a lot of focus on working capital as well. There can be huge cyclicality in retailing businesses, so they need to work with the banks to have sufficient working capital on the balance sheet when it is needed.”

She recommends the production of integrated profit and loss, balance sheet and cash flow forecast reports if possible as this will allow banks and other funding partners to see exactly what is happening in the business. “Don’t be afraid to put a loan ask into the forecast as this will demonstrate the business’s ability to pay,” she advises. “The banks are being reasonable, but they are looking for as much detail and accuracy as possible.”

Financing options

And the banks aren’t the only game in town when it comes to loan finance. “There is a lot of capital out there, it’s not 10 years ago,” she notes. “There is an appetite to lend but that is softening in some areas. There seems to be a presumption that the pillar banks are the only option. That’s not the case. Asset backed lenders can help as well and over the last 10 years quite a few alternative lenders have come into the market. They are a little bit more expensive, but they can be very flexible and useful.”

O’Leary advises retailers to carry out detailed working capital analyses for the year ahead. “You have to get into quite granular analysis to look at every area where savings can be made. It is also worth having commercial discussions with suppliers now as the business dynamic may have changed. You’ve got to have those discussions now. Businesses can also look at simple things like payment run frequency and do a deep dive to see where cash flow improvements can be made.”

Given what Cryan describes as the “monumental disruption” experienced by retailers during 2020, they need to prepare themselves for some potentially difficult conversations with their auditors. This is the view of Tom McEvoy, an audit partner in the KPMG Ireland Consumer and Industrial Markets group.

“The range of business issues which auditors may wish to discuss is vast,” he says. “Brexit is one example. Auditors will want to know what impact it will have on the business and its supply chain. COVID has had a huge impact on everybody. The auditors will need visibility on how your business is likely to perform in the short term, particularly if there are new restrictions. Issues like the medium to long term impact on economic activity of high unemployment and potentially increased taxes will be hard to predict but auditors will want to know how you have considered the potential impacts that these might have on whether the business is a going concern.”

The pivot to online

The pivot to the online world will be another topic of conversation. “We have to look at the future of retailing and ask if people will switch back to shopping in store or stay online. That may have an impact on business models. Retailers may have to invest in new distribution channels, change their supplier relationships, and incur additional staff costs. Can the business make the change from bricks and mortar to an online or hybrid model?”

That will also have cybersecurity implications. “Auditors may have to test IT systems and cyber defences,” he adds.

And then there is the small matter of the ISA 540 revised standard for estimates and related disclosures. “Every set of financial statements has estimates made by and the directors and finance management teams,” McEvoy explains. “There needs to be a review of all financial statements to look at where the key estimates have been made and then where the data has come from in determining the estimates. Retailers can expect their estimates to be challenged as the auditor will be trying to assess if there is a bias one way or the other.”

Finally, McEvoy advises retailers contemplating restructuring to proceed with urgency in order to have it recognised in the 2020 financial statements rather than in 2021. “Businesses should try to get things like covenant waivers in place in good time before the year end. When looking at restructuring costs that will have a financial impact, you need to take certain steps including starting discussions with those affected if they are to be recognised this year. If you’re going to have a bad year, have it this year.”

Watch our webinar

For more, watch our webinar where Tom McEvoy, Hazel Cryan and Andrew O’Leary discuss the issues raised in this article.

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