Surviving the Liquidity Crunch

Stabilise by Determining Cash Flow Demands and Lowering the Break-Even Point

When the COVID-19 lockdown regulations unexpectedly disrupted ‘receipts’, whilst leaving ‘disbursements’ unscathed, business focus rapidly shifted to ensuring healthy operating liquidity.

Why the sudden drive for Liquidity and how do we respond?

The government imposed COVID-19 lockdown regulations impacted the lives of all ordinary South Africans. In the business arena a clear distinction was drawn between ‘essential’ - and ‘non- essential services’.
For companies operating in the ‘essential services’ arena the impact was arguably less severe, some companies found themselves in the complex (but less severely impacted) space of a ‘quasi essential services’ provider and then lastly the remaining group of companies were faced by the daunting impact of a complete elimination of all revenue generating activities.
The distressing prospect of the first post lockdown supplier payment run, further exacerbated by the month end payroll and defaulting customers left management with the following questions:

Is there an immediate cash crisis?
When will a cash injection be needed, and how much cash is required?
Is the cash crisis the result of fundamental business issues, capital structure issues or both?
Is this a distressed situation or just a performance improvement scenario?
Is there a chance that the company may need to file for business rescue or liquidation?
What areas of the business are the most capital intensive?
What levers can be pulled to mitigate potential cash shortfalls?

It is critical that the ‘business response journey’ is well planned and coordinated, including the following phases: Liquidity and solvency assessment; Strengthening the balance sheet and Lowering the break-even point.

Step 1

Liquidity Assessment

When the economy is operating in positive territory and quarterly cash inflow is exceeding outflows, most successful businesses believe they can weather an economic storm.

But experience shows very few companies have sufficient liquidity built into their normal operating model to survive a quarter where cash inflow is significantly impacted.