The coronavirus pandemic limits or suspends the activities of producers and retail networks for the time being. When the number of new cases falls and the restrictions are gradually lifted, a time of “new normal” will come. During this 1–2-year period, extreme caution of consumers may lead to declines in the majority of FMCG categories and reduce the number of customers in stores.
Companies must act now in order to be prepared for that situation. These actions should focus on accurate liquidity planning, cash reserve protection and a review of cost reduction scenarios.
Taking into account the falling revenues and possible operational difficulties regarding supply chain, efficient cash flow management becomes crucial in the retail and consumer goods sector. Full understanding of the company’s cash flow structure through modelling them with the use of the direct method is the first step to achieve that. This will make it possible to swiftly react to the current events based on the company’s actual liquidity and help locate any payment bottlenecks. Today, cash flow transparency must be a priority not only for CFOs but also for CEOs. In order to smoothly achieve full transparency of their cash positions, the companies’ actions should include:
Forecasting financial liquidity on an ongoing, a weekly or even daily basis, depending on the company’s financial standing – preferably using the tools with automatic data download from the ERP system;
Continuous monitoring of cash flow deviations and clarifying bottlenecks with the owners of specific positions, starting from the largest ones;
Strict controls of all company expenses and their approval by a limited number of people in each case.
The second step to efficient financial liquidity management is the creation and protection of a cash cushion which will make it possible to survive in the case of deepening recession. The lessons learned from the previous financial crises show that the cash cushion was one of the key factors determining company survival or bankruptcy. Under the current circumstances, the companies should focus on reducing the working capital employed and cost-cutting. This can be achieved by:
Prioritising financial liquidity in the company’s operations – coordination with purchasing, sales and/or production on an ongoing basis, with feedback;
Extending the effective payment term of receivables – streamlining the internal process of entering invoices into the system, reviewing framework agreements with suppliers to exploit the potential for postponing repayment dates, and possibly renegotiating the agreements;
Using the government relief and support package for business in the event of meeting the criterion of accounting revenue loss year on year – particular attention should be paid to postponed payments of VAT and CIT advances for March and April 2020. The drafted subsidies from the guaranteed employee benefits fund may also contribute to real improvements in liquidity in the case of smaller companies;
Negotiating the postponing of loan principal repayments – the current situation shows that banks are open to repayment holiday not only for individuals but also for SMEs.
Having taken care of short-term liquidity, the companies need to review their revenue plans for the next 24–36 months and prepare several scenarios. The variant assuming that the situation comes back to what it had been before the epidemic after a few months of economic slowdown seems rather unrealistic. The state of “new normality”, which will last from the time of relative stabilisation of the epidemiological situation until the virus is completely contained thanks to a vaccine or therapies, will take – realistically speaking – at least a year. For the next 1–2 years, we will face a decreased consumer appetite for spending. Thus, we should have several scenarios in place covering such a time-frame.
The steps on the cost side should include:
Reviewing sales efficiency – which sales reps have poor performing areas? Which stores face borderline profitability and can be excluded from the service by field forces? Which sales support budgets are the most discretionary ones and we have almost no certainty as to their efficiency? Are we able to increase the number of representatives per regional manager and director?
Reviewing marketing budgets in terms of criticality and ROI – which campaign elements are really crucial in the short term? Are we able to reallocate communication to the channels where the results are easily measurable? Are we able to temporarily limit the support for some brands? Can we suspend image- or PR-related activities of general nature?
Alternative scenarios for the supply chain in terms of possible fast savings in the entire process – Are there any alternative paths of the flow of goods? What is their cost and how do we have to alter the volume of orders to adjust the time-frames and costs to the new situation? Have we verified all our suppliers and their suppliers in terms of security of deliveries? Do we have alternative or worst-case scenarios in place for the entire supply chain, from procurement through production and ending with sales?
Rationalising employment and other direct costs in production functions – what utilisation of production capacity do we anticipate? How much are we able to change the number of employees? What are the possibilities as to the fast process automation? Can we limit the maintenance costs?
Reviewing purchasing costs and selecting items for cancellation / renegotiation / reduction in the service level – from which purchasing items can we temporarily or permanently resign? Where does our bargaining power allow us to renegotiate the price? Is it possible to create a purchasing group or join one? Can we consolidate some suppliers? Can we improve the purchasing process?
Quickly reviewing administration costs and overheads – can we outsource some back office functions (accounting, human resources, taxes)? Are we able to quickly automatise controlling and reporting, and if not – scale them down temporarily? Can we limit the back-office support for the managers? Can we differentiate the costs of specialist services (legal service, PR)?
Implementing quick wins and medium-term savings in the realistic scenario;
Clear criteria for taking additional measures in the pessimistic scenario.
This publication is for information purposes only and does not constitute legal advice within the meaning of Polish law. You should not base your action/decision on the content of the information contained in this publication without first obtaining professional advice.
Partner, PwC Poland
Tel: +48 513 092 846
Wicedyrektor, PwC Poland
Tel: +48 519 504 153