Question

1). Identify each component of working capital and the effects that the COVID 10 pandemic is having on business. What measure or ideas would you have as Treasurer or CFO of a business to effectively manage working capital during this time to help keep your business running and employees working. Assume that additional bank financing is not available at this time.

Answer 1

The COVID19 pandemic throws fresh challenges. Each of the components of working capital is impacted by this.

Cash and cash equivalents - A component of current assets, signifies the liquid holdings with the company to ensure smooth operations of the business. During a pandemic situation, the liquid holdings are low due to higher receivables and the company facing higher operating expenses as compared to revenue from sales.

Account receivables - A component of current assets, these are revenues due, what customers owe for the past sales. The impact of the pandemic has led to an increase in the average number of days of account receivable, thus straining the working capital management. Delay in payment from customers and in the worst case, defaulting on the account receivables is a possibility. This has contributed to decreasing the account receivable turnover ratio, thus straining the working capital management

Inventory - Inventory is the company primary assets that generate revenue. The pace at which an inventory is replaced is indicated by the inventory turnover ratio and higher the ratio means shorter the time the company takes to replenish its inventory. Due to the sudden halt in the operations, and a sudden drop in demand, inventory already in stock would be taking too long to be sold. Hence, account payables will increase adversely and the high inventory levels would lead to inefficient use of resources.

Account payables- A component of current liabilities, these are revenue due by the company to the customers, from whom credit has been obtained usually for inventory. The pandemic has adversely affected inventory and accounts receivable as discussed above, leading to higher amounts of accounts payable. A negative impact of this is the worsening of relationships with the suppliers.

Measure which must be taken during this pandemic situation to manage working capital:

1. Daily monitoring of cash flows should be undertaken

2. For receivable, we must consider shorter payment terms in return for discounted payments.

3. Start communicating with clients immediately, to get the status on receivables, because, provisioning and arrangements can be done better by forecasting future payments.

4. Focus on maintaining inventory, which is expected to replenish in a short amount of time and trying to dispose slow moving stock

5.Optimizing internal cash transfers to use liquid assets optimally

6.Prioritize customers with large debtor balances