When dealing with the unknown it’s often best to, as Benjamin Disraeli said, plan for the worst and hope for the best.
It’s unclear how extensively the Covid-19 virus will spread or how long it will continue to disrupt - our advice assumes that disruption could continue for up to 6 months. So what should treasurers be doing in addition to any protocols issued internally for all staff?
Immediately
Business Impact: Discuss and test the impact on the business with finance/business colleagues.
- What is the current and potential impact on customer demand?
- What is the current and potential impact on supply chains and working capital?
- What’s happening to inventory (either in the UK or in China). Is it building up and will this affect sales and cashflows?
- Do you know your country exposures for both customers and suppliers?
- Are there business actions that are being contemplated eg closure of manufacturing or logistics sites?
- How frequent are your updates on business performance?
- What are the business base case, best case and worst case, and how often are these being updated?
Liquidity: Financial services firms often set their liquidity risk appetite as three months of outflows and assume no customer receipts during this period.
- Do you have sufficient on-demand facilities and liquid assets to support normal demands of the business?
- What are the liquidity requirements under various business scenarios? Do you need to put in place extra emergency facilities or hold more cash?
- Is your cash forecasting sufficiently accurate? Do you need better visibility of your AP and AR ledgers? Do you need to communicate with the procurement and sales teams to ensure that you’re getting better information during this period?
- As it is usually best to approach when you are in a strong position and planning for an adverse scenario, rather than approaching your financing providers at a later stage, if your scenarios show a risk to your cash position or debt covenants, when should you approach your bank or funding providers for a discussion?
Operations: If you cannot travel to the office, your treasury, payments, banking and receivables teams will need to be able to access banking information from home. Businesses will be at greater risk of cyber-attack and payment fraud.
- Do these teams keep their banking tokens and access codes with them at all times?
- Are these teams able to communicate effectively with each other to settle payments?
- Are you able to employ enhanced checks on potentially fraudulent payment requests?
- Have you increased training and general awareness of the risks of cyber-crime and payment fraud?
- Is there sufficient bandwidth at home for staff to access the company network in a secure way that does not use public wifi sources? If not do they have an alternative solution?
- Do they have printed or locally saved copies of any key contacts at the banks, key system providers, Money Market Funds, and colleagues?
- Do you have any contingency plans with your main banks to ensure that key activities can continue? Do you have a buffer overdraft that you can utilise?
- Can you undertake FX deals or other transactions from home? What different controls would you need to apply to ensure that operational risks were continuing to be managed? Do you have access to real time market data (e.g. Bloomberg)?
- Do you have details to ensure that any bond payments can continue to be processed (i.e. up to date bond holder records, etc.)?
Also: if significant numbers of your team are ill for a period of time, what are the implications and what back-up plans can be considered?
Strategic and longer term
Funding: The virus will affect businesses in a variety of ways including the balance sheet and income statement. If you have a March 31 year end, your results may be affected.
- How will the business be affected in the short and medium term? Do you have enough accurate data?
- Will profits in some / all jurisdictions be affected?
- Will working capital demands increase?
- What are the indirect as well as the direct costs?
- What will insurers be expected to cover?
- Do you need to delay certain capex and opex intensive projects and if so what are the financial implications of this?
- Are there key events / annual activities that will affect your business plans?
- What impact could this have on any of your covenants that could be tested during the period affected?
- If you were planning on issuing new debt, do you need to reconsider the timing? If so what, if any, implications could this have?
- If you had to continue to plan for a new debt issue:
- Do you need to rethink the investor roadshow and how you would communicate with potential investors?
- Do you need to update the risk section to reflect the impact of the Covid-19 on your business?
- If the equity markets continue to fall, what impact could this have on your covenants and access to funding? Have you undertaken any reverse stress testing to assess how low markets / your share price would need to fall to before you needed to take critical actions?
Operations: Most business continuity plans assume a short level of disruption, but how long could key activities continue to be performed?
- Have you assessed how key activities could be performed in the medium / longer term?
- Do you need to look at different collaboration tools like Slack and Microsoft Teams?
- Do you need to redesign your preventative and detective controls to manage new operational processes?
- Do you need to increase your buffers for cash management and FX hedging?
- Do you need to plan differently for absences of key staff either due to Covid-19 or pre-agreed vacation time?
- Could you use different office locations to do different tasks?
These are some of the key considerations that we would advise you to address when performing your risk assessment. As we have said, it’s better to be prepared.
