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The liquidity challenge that the recovery phase of the COVID-19 crisis poses is hard to underestimate. Social distancing, the availability of testing/treatment and potential ‘bumps in the road’ will all weigh heavily on business confidence and the wider economic environment.

Businesses of all shapes and sizes will be required to plan, model and pull a range of operational, financial and strategic levers, but in doing so must also consider the capital structure implications of these actions when facing up to a new reality.

01 - The bridging requirement will be defined by the liquidity need - cash visibility is essential

  • Building and maintaining a robust Short Term Cash Flow (STCF) forecast will support finance teams gain visibility of daily cash outflows and identify pinch points
  • Stress testing is essential – identify sensitivities driving cash outflow and build headroom for unexpected cost
  • The exercise of building the model will help operational and finance teams agree on what commercial performance needs to be achieved in order to operate sustainably during the recovery phase. 

Other key considerations when modelling cash flow

  • What revenue/cost assumptions are being made? Are these realistic, given consumer sentiment, social distancing rules and new costs e.g. Personal protective equipment (PPE)? 
  • Can the business flex capacity and costs easily as demand changes? Have client requirements changed?
  • Have you revisited the key working capital and lead time assumptions under-pinning the cash flow timing?

02 - Financial scenario planning will need to take into account an array of factors,

most of which will be difficult to accurately model and/or require regular reappraisal

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03 - Strategic funding levers should be considered through the recovery phase

The recovery phase could be long and may come with an increased funding requirement. How can you adapt the shape of the business to a new future and can you generate or preserve cash strategically during the process?

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Example ‘hard decisions’ already being taken

The restaurant chain

  • Concluded return to ‘normal’ trading remains too far away.
  • Even after modelling aggressive cost preservation strategies likely to be insufficient funding available to realistically resume any form of trade in the current environment.
  • Considering whether to enter an insolvency process now, with a view to identifying funding options for future NewCo restart.

The industrial distributor group

  • The business worked hard to demonstrate it was operationally possible to reopen its full distribution network.
  • However when layering in the commercial risk considerations, it was clear that to re-establish a financially resilient business, a significant proportion of the branch network would need to close permanently.

The family business

  • Trading well pre-COVID, cost reduction measures taken; CLBILS application viable.
  • Stood down CLBILS application as debt burden would erode equity value over time and consume free cash flow.
  • Family exploring a sale or wind down as more attractive options, avoiding creating a debt-laden ‘zombie’ business.

04 - How can KPMG help

  • Financial Modelling - Our team can support your business model and stress-test immediate or longer-term cash forecasts and underlying assumptions.
  • Cash and Working Capital - Help Identify and implement significant working capital savings using our data analytics tools.
  • Options Analysis - Although the environment is extreme, our robust and proven methodology can support businesses work through the financial, legal and practical implications of each option.
  • End-to-end - Implementation We can support companies navigate this uncertain economic environment and protect stakeholder value.