Cash Flow Problems – Economic Shock 8/8

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In this final of a series of eight blogs, our banking experts are looking at common cash flow problems that businesses encounter. In this blog, Alexei Garan discusses what happens when a company finds itself facing an economic shock.

What is an economic shock?

Covid-19 is the most recent and significant example of an economic shock. As governments around the world introduced public health measures to stop the spread of the virus, the flow of goods and people was rapidly constricted. This led to many businesses temporarily closing and economies stalling.

Businesses may face other types of economic shocks including the following:

Supply shocks are events that make production across the economy more difficult or costly due to rising costs of commodities.

Demand shocks happen when there is a significant shift in the patterns of consumer behaviour.

Policy shocks are changes in government fiscal policy that have a profound impact on consumer spending.

Any type of shock – whether macroeconomic or sector focused – is difficult to predict and can be highly disruptive to cash flow.

General prudence, including having ‘rainy-day’ cash reserves and facilities to draw on will leave you better placed to survive a prolonged period of uncertainty.

But for those businesses that are not well prepared for a shock may find their long-term viability under threat.

What are the key indicators?

The following indicators can help you establish if you are vulnerable to an economic or sector shock:

  • A lack of funding options. The recent Coronavirus pandemic has led to banks being used by governments to distribute emergency loans such as Bounce Back loans, CBILS, and CLBILS. This illustrates how, without government intervention, economic shocks can cause credit squeezes that may threaten the viability of your business.
  • A company being managed out of a business banking unit rather than having a relationship manager. In times of economic shock this can cause acute challenges for a business.
  • A lack of contact or interaction from their bank.

When faced with an economic or sector shock, these are the steps that key stakeholders within your business should take:

Role of the MD/CEO

The MD needs to take control of the emerging situation by:

  • Conducting a SWOT analysis to evaluate the impact of macroeconomic factors on the business.
  • Evaluating flex budgets by taking into the account the current or oncoming shock.
  • Exploring options to mitigate the impacts of the shock on the business.

Role of the FD

The FD needs to take responsibility for identifying internal and external solutions to protect cash flow by:

  • Ensuring sufficient facilities are in place to provide headroom in the event of a shock.
  • Assessing flexed budgets in relation to the shock and reviewing what facilities are needed.
  • Maintaining and building sufficient banking relationships to support the company.
  • Maintaining multiple banking and other funding relationships.

Role of Ops/Sales

The Sales and Operations teams need to support the MD and FD by:

  • Constantly reviewing and amending trading terms, contracts and operational activities.
  • Ensuring that the business adapts to the shock and is correctly positioned to take advantage of any new opportunities it may present.
  • Operating collaboratively with the finance and sales &marketing functions to mitigate the impacts of the shock.

Key points

You must evaluate whether your capital structure could withstand a shock. It is important to ensure that your existing facilities provide sufficient headroom to withstand a shock and that your business is not over-leveraged. Make sure you manage your balance sheet to prevent a lack of capital placing pressure on your business and its growth ambitions.

I hope this blog has provided some useful tips on what happens when a company is facing an economic shock and how your teams should work together to avoid bankruptcy.

If your business is facing a similar cash flow situation, please do feel free to contact me, I’d be delighted to help.

Alexei Garan – Head of Debt Advisory, Shaw & Co

Alexei leads Shaw & Co’s Debt Advisory team and supports clients in a range of sectors including Energy & Renewables, Engineering, FMCG, Healthcare, Human Capital, Leisure, Manufacturing and TMT. Over the last 10 years, he has advised on over £2bn in restructured post crisis client portfolios and arranged over £400m in client funding. Alexei has also been called in as an expert witness in several post-financial crisis legal cases.