The COVID-19 pandemic has caused some serious issues for organizations of all sizes across the Canadian business ecosystem. As the crisis evolves, it remains unclear how long the disruption will last and how deep the impact will be to the economy. This duration directly drives the amount of capital that businesses will need in order to survive. While this uncertainty creates challenges, there are actions you can take that will allow you to determine how to source the required capital and better weather the storm.
Key mitigation strategies
Cash preservation is paramount
The importance of liquidity is crucial to ensuring a company has the flexibility to navigate these turbulent times. An in-depth look at a company’s costs can help prioritize where cash should be deployed. This is to assess minimal service-level requirements and the associated cost profile (fixed vs. variable).
You need to examine all capital expenditure initiatives and delay all non-essential projects. Decisive action to preserve cash can buy time to allow the economy and the impacts on the business to stabilize. Moreover, looking at all possible actions to maximize cash flow; applying for any available credit or government programs can provide added support.
Strategic assessments are critical
Key stakeholders need to do their part in proactively managing and mitigating risk. A business risk assessment can identify operational, financial, and market risk. You need to determine direct and indirect impacts, third-party vulnerabilities, and generate action and mitigation plans.
These types of analyses are critical to ensuring a company has the assumptions needed to identify and plan for financial impacts. This means looking at the business and potential micro and macro implications, given the state of the current environment.
As the situation evolves, continuously updating risk assessments based on the latest developments can help position the business to mitigate these risks with more foresight.
Quality information drives quality decision-making
With too much information, people are faced with analysis paralysis. As this is a delicate time when attention is extremely focused, quality and relevant information needs to be at the forefront.
The combination of decisive action to preserve cash with a clear understanding of the various risks across all relevant stakeholder groups positions companies to assess their current financial position and determine the amount of required capital moving forward. In this instance, important stakeholders include customers, suppliers, employees, and lenders. One of the things that existing stakeholders will require is visibility about your near-term cash flow position. Every business now needs a weekly cash flow forecast, particularly for working capital. While that forecast can be as simple or as complex as the business dictates, it is critical to model a forward-looking cash flow analysis now.
To establish your capital requirements, we can help develop an integrated financial model that assesses your current financial position and allows you to run scenarios based on the ever-changing market conditions—helping to predict the capital you require in the near to mid-term.
With a completed business risk assessment and a robust cash flow forecast, you can identify the near-term capital requirements. You can also determine whether the existing balance sheet and lender relationship is going to provide adequate liquidity. If the existing positon and forecasted model leads to a projected shortfall, then additional strategies need to be considered.
Potential sources of capital
With quality information and a plan to work through the next few months, lenders are focused on supporting their existing clients through the pandemic, possibly open to either providing some incremental capital or more flexible terms. Look at any excess collateral your organization may have, as it can help in facilitating this support. Just be extremely cautious of providing personal guarantees.
New or supplemental lenders
Depending on the nature of the business and the current debt structure, there may be opportunities to create a new lending relationship with a firm that is able to leverage the operations and associated assets in a more suitable way. This could open up a stream of available capital.
Depending on the nature of the business, there may be an opportunity to identify and source capital from an equity investor. While this extra support can help the business navigate challenges financially, it might change your position of power. So be sure to determine the level of control you’re willing to forego if you opt for this source of capital.
Formal or informal, a business restructuring opens up the potential to leverage a combination of the tools outlined earlier. It also opens up other strategies; like a partial or full sale, ensuring a sustainable business is preserved and stakeholder value is protected.
How we can help
Our Financial Advisory team is committed to ensuring that our clients have the right information to assess their current needs and have access to whatever the market has available to get them through these challenging times. We’d be happy to discuss how accessing capital could ease your situation.
Contact us today
Ryan Farkas, Partner, Transaction Advisory Services
Clark Lonergan, Partner, Financial Recovery Services
Dan Jennings, Partner, Valuations