The coronavirus outbreak is as financially unprecedented as it is medically. There has never before been a period where almost all companies have to collectively check their liquidity and gauge the short-term future in such a critical way.
Inevitably, the pandemic has severely disrupted the trade and revenue of several businesses across the world. The majority of these companies, regardless of their size, are now incessantly suffering from negative operating cash flows.
Of course, a business’s survival amid any crises depends on how they address their liquidity issues. Apart from establishing a recovery team and a mitigation plan, what are the other important ways to manage business income loss proactively?
Forecast Cash Flow
Setting up a cash flow forecasting process is one of the first critical steps to take during this COVID-19 crisis. It helps make a business’s future financial position more visible based on a company’s current expected receivables and expenditures.
A cash flow forecast helps a company manage liquidity, meet financial obligations, prevent funding issues, and improve working capital. With this, a company can make informed decisions more effectively and efficiently whenever a liquidity crunch occurs. Generate a short-term or 13-week cash flow forecast. A 13-week forecast is needed to determine any quarterly payments or receipts that could be concealed in some parts of other periods.
A weekly prediction has the best level of granularity required. In contrast, a monthly forecast doesn’t have sufficient information to diagnose low cash points, not to mention enough time to give a company’s management in taking corrective actions. This 13-week forecast should be stress-tested, anticipating worst-case scenarios. Each fixed and variable expense should be thoroughly sense-checked to prevent financial surprises.
Opt to use a cash-flow tool and create model scenarios to ensure downside risks are mitigated. More importantly, keep cash-flow forecasts rolling forward weekly to incorporate the latest available information.
When profit disappears, liquidity is at the core. After setting up a cash flow forecast process, a company will have a clearer overview of the severity of its cash-flow strain. From there, the next thing companies would want to do is to seize every opportunity in boosting cash inflow.
Here are some typical tangible actions to maximize liquidity when a business suffers from income loss:
- Offer cash reductions to clients who make repayments quickly;
- Apply cost rationalization;
- Apply extended credit, fast cash loan, business loan, or second mortgage;
- File for business interruption claim;
- Reschedule payment period for remaining expenses.
That said, assuming that the COVID-19 pandemic will remain rampant and the company isn’t making money anymore, it would be ideal if all businesses will have a comfortable liquidity runway.
Properly Document Liabilities
In addition to maximizing a business’ liquidity, companies should create an effective record-keeping in the weeks and months ahead since it’s still unpredictable when the coronavirus pandemic will end.
According to experts, a company should conform the following when logging liabilities in a clear and comprehensible manner:
- Establish a general ledger account to track incremental costs. In the company’s cost accounting system, collate all expenses and losses related to COVID-19 in a separate account number.
- Enumerate the company’s operating baseline. To do so, carry out a two- and three-year review of how the company’s business performs before, during, and after the coronavirus outbreak.
A sound financial supporting documentation can improve the chances of receiving assistance from local small business administration (SBA) and even the federal government. It also aids businesses in getting reimbursed for business insurance claims on time.
File A Business Interruption Claim
For companies that have a business interruption policy, there’s a need to review policy in detail. Keep in mind what’s included in the coverage, like the type of losses covered and the policy’s limitations. If there are confusing language and structure in the policy, clarify them with the insurance company or an attorney.
Also, as mentioned, a business interruption claim can be more likely granted if a company presents a sound financial supporting documentation. It should prove how COVID-19 negatively impacted their business. It should include customer attrition rates, incremental expenses incurred, and the loss of income as defined by the insurance policy.
Since most companies are on the brink of financial distress due to the COVID-19, now is the best time to submit a business interruption claim. However, before filing a business interruption claim for COVID-19 losses, understand why the majority of insurance companies think otherwise nowadays.
Insurance Companies’ POV on COVID-19
First, some insurance companies are claiming that the current pandemic is a “Force Majeure” event. This legal defense essentially frees a party, in this case, the insurance company from fulfilling its obligations due to unexpected circumstances that are beyond the control of the involved parties. These insurance companies believe that the COVID-19 outbreak is one of those events.
Second, as stated in the majority of policies, coverage is only provided if and only if a company or policyholder goes through a loss of income caused by a direct physical loss or damage to covered property. According to insurance companies, COVID-19 is neither a physical loss nor damage to covered property.
Third, coverage for loss of income isn’t provided for government actions that are designed to curb the spread of COVID-19. Specifically, it isn’t provided to policyholders because of market conditions or economic slowdown related to the current pandemic.
Fourth, the pandemic is uninsured because, in the first place, it’s uninsurable. Most insurance policies provide coverage that replaces business income loss that’s caused by a natural disaster. However, the COVID-19 isn’t a natural event, but rather a contagious disease caused by human actions.
On the contrary, legal experts on the side of business owners oppose the idea that COVID-19 isn’t a physical loss. It has been scientifically explained that the coronavirus attaches itself to physical surfaces, and people have to disinfect to get rid of them. As such, the coronavirus causes physical loss.
What’s more, the existence of viral infections like SARS (Severe Acute Respiratory Syndrome), Middle East Respiratory Syndrome (MERS), and Avian influenza in the past should give insurance companies enough idea to foretell the subsequent pandemic involving another virus. It’s part of their business; they’re “insurance” companies after all.
Nowadays, there’s a tidal of litigation on business interruption coverage, and policyholders are taking legal actions against their insurers. It drove a lot of lawmakers to consider passing bills that urge insurance companies to release insurance payouts under business interruption insurance policies. Unfortunately, this matter isn’t settled yet. That’s why there’s a need for you to go to the basic way of claiming coverage; hopefully, your insurer can understand.
Connect to Key Contacts
Lastly, maintain a healthy channel of communication with all of the company’s key business relationships. That includes clients, partners, suppliers, vendors, consultants, employees, and insurance companies. Everyone is experiencing significant adversity caused by the coronavirus, so make sure to ask how they are doing and be compassionate.