A Guide to Crisis/Cash Management and Contingency Planning: Part 1

The following content has been generously shared with us by Timothy Thompson of FTI Consulting.

COVID-19 is an economic crisis in addition to a humanitarian one. As the humanitarian and economic impact of COVID-19 ripples through the world, companies must develop a framework to identify, anticipate and mitigate the disruption that their everyday activities will face. Companies have an obligation to support and ensure the best outcome for their stakeholders which include employees, customers, shareholders and others.

Below (Figure 1) is FTI's view of the immediacy how COVID-19 will affect certain industries. The closer to the center of the circle, the greater the impact. In FTI's opinion, very few industry verticals will remain immune.


FIGURE 1: THE RIPPLE EFFECT OF COVID-19

The severity and speed at which COVID-19 has impacted the economy, is unprecedented. We all are trying to understand what it means to the short- and long-term prospects of businesses, industries, and the greater economy. FTI has seen the ups and downs of various print industries in the past decade (directories, newspapers, magazines, etc.), many print businesses are working on thin margins due to secular declines in their business. A delay or loss in revenue will have a detrimental effect on the ability of the business to pay its employees and keep the doors open.

As a sobering reminder, printing (the general industry) fell 10% (2007-09 CAGR) during the last recession and did not recover to pre-2008 levels. The industry bottomed out at (18.7%) YoY decline in 1Q09.


FIGURE 2: COMMERCIAL PRINTING SHIPMENTS, YEAR-OVER-YEAR CHANGE BY QUARTER

 


FIGURE 3: COMMERCIAL PRINTING SHIPMENTS, MILLIONS OF DOLLARS, QUARTERLY, SEASONALLY ADJUSTED
Source: https://fred.stlouisfed.org Value of Manufacturers' Shipments for Nondurable Goods Industries

Further, peak unemployment claims have already exceeded any one peak month during the great recession. In real time, feedback from clients suggest that advertising dollars are down anywhere from 20-50%. There will be a trickle-down effect for those who print content, marketing and advertising materials.

In these unprecedented times, businesses require decisive actions that balance the need for preservation with the needs of your employees and stakeholders. Below is a list of considerations as you embark on this unexpected journey:


FIGURE 4: COVID-19 RESPONSE MATRIX

Put health and safety first, always. While continuity is important, it must be clear that the company will not take unnecessary risks to keep doors open or protect the bottom line. Establish clear accountability and continue to emphasize the commitment.

Build a reputation for transparency with timely information about the current state. Jumping straight to policy updates or other next steps leaves recipients to speculate about what prompted the communications - and in this environment, they'll jump to the worst-case scenario. Confirm where you are before explaining where you're going.

Ensure decisions are properly vetted before they are communicated. Well-intentioned efforts to get information to stakeholders quickly can inadvertently miss key implications or interdependencies, creating problems down the road. Create a coordinated working group, including Health & Safety, HR, Operations, Commercial Leadership, Supply Chain, Legal, Finance and Communications.

Be specific about the actions the company is taking - but keep it in the present tense. Whether you're announcing enhanced hygiene practices, contingency plans or the impacts of a location shut down, you will not earn stakeholders' trust with vague generalities. You will not keep it without acknowledging that policies will necessarily evolve along with the situation.

Leave facts and guidance to the experts. Information is evolving quickly and, unfortunately, there will be litigation as people second-guess the decisions being made today with the benefit of hindsight. Point people to the CDC and WHO websites for the latest updates about how the virus is spreading and how people in different parts of the world should respond. Avoid interpretation.

Underscore that efforts are part of an ongoing commitment. Acknowledge existing policies and practices as you announce enhancements. As appropriate, point to the prior experiences that helped to test and refine your approach.

Rapid Financial Assessment and Contingency Plan

In a situation such as this, liquidity can quickly become a major concern. Maintaining liquidity and adequate reserves means the business can be flexible in its response to the various surprises that are likely to continue in the short-term. Many businesses, as evidenced by anecdotes from FTI Consulting clients, are experiencing downside shocks to revenue that have never been seen before. Further, some of your customers will be unable/unwilling to pay due to their own cash preservations efforts. To determine your cash flow risk, FTI Consulting suggests the following actions are undertaken.

Scenario and Contingency Planning: Update business plan and forecast, determine key business risks and assess operational readiness, run sensitivity analysis for downside scenarios, generate options planning, stress test key business drivers, monitor and determine 'one time' and long-term impact of COV-19. Review the health of your customers.

Strategic Communications: Maintain ongoing dialog with all key stakeholders, put health and safety first, build a reputation for transparency, vet decisions before communicating, be specific about company actions and communicate in present tense, defer health facts and guidance to experts, articulate ongoing commitment.

Supply Chain: Monitor key Tier 1 supplier risk and map geographic impact, develop plan for dual-sourcing or alternate supply, identify Tier 2 & Tier 3 suppliers that Tier 1 supplier utilize for critical items, review and assess impact of potential supply delays, integrate updated business plan and forecast to supply forecast.

Cash Flow and Covenants: Prepare rolling 13-week cash flow forecast to activity, manage liquidity forecast and actuals, stress test for downside risk, document and test covenant thresholds, engage in critical lender communications, manage working capital through the liquidity cycle.

Cost Management: Assess cost structure for Variable and Fixed Costs, reduce discretionary expenses to maximize cash position as the situation stabilizes, identify core business units and assess business unit profitability, rationalize key vendors and contracts in alignment with supply chain strategy.

People: Review disaster recovery plans and ensure capabilities for remote work support, assess health insurance coverage and, if applicable, the ability to self-fund insurance, perform capabilities evaluation for alternate staff to cover key roles, assess need for interim resourcing and expertise.

Stay tuned tomorrow for more detailed cash flow management strategies.

Timothy Thompson is a Managing Director in the Publishing + Digital Media practice. Mr. Thompson has more than 15 years of consulting, project management, and mergers and acquisition ("M&A") advisory experience focusing on post-merger integration and change management in a variety of industries, including publishing, manufacturing, logistics and distribution, engineering and construction services, and telecommunications.