Earlier in the year, we penned a blog about the state of the Kenyan economy in 2020 based on a discussion at our client cocktail. The overarching theme was that we needed to steady ourselves due to the economy being fragile and investors taking a wait and see approach. What we could not anticipate at the time was the compete upheaval that was looming a few months down the line.

The Covid-19 outbreak has had a significant impact on the world with people losing their lives, others being critically ill, not to mention the impact on those who have lost their jobs and are facing financial turmoil. In light of this, we held a free webinar to help decision makers of companies as they think about and execute their scenario planning, especially with limited information about the future. We chose to do this since on a day to day basis we spend a lot of time painting futures for clients using financial models. We have found that models help to remove the gamble from complex decisions, especially financial ones.

As at the time of penning this blog (3^rd of April 2020) in the East African region, governments have put measure in place to cushion the blow. In Kenya, an appropriation of USD 100 million has been set aside to assist the vulnerable in society and the Central Bank of Kenya released USD 70 million to combat Covid-19. Other measures have included tax breaks and salary cuts to government officials. In Rwanda, banks are to ease loan repayment conditions with an estimated USD 17 million to be used over a period of 6 months while in Ethiopia, the government has allocated USD 10 million to fight the pandemic.

When we asked participants of the webinar what some of their key concerns were at this time, the responses revolved around cashflow management, how to stretch the company’s runway, what operational changes to make to prevent losses, maintaining a work force without layoffs, how long the pandemic will last, among others. While no one can really answer the last concern of the list and with imperfect information, it is still important to act now! In our webinar, we look at two case studies. In our analysis, the fundamental motive was to ensure that organizations are able to survive the Covid-19 financial effects so that they continue to pursue the core mission.

We approached the webinar with a view to help a CEO or  CFO with a framework to use to improve their liquidity, as we believe cash in king whenever there is uncertainty. We went further and considered what additional actions a company with debt in its capital structure would need to take to address the cash question.

On the first question of how to improve liquidity generally, we believe there are 5 key questions that CFOs and CEOs need to ask, these are:

1. How much cash do you have?
2. What is your average burn rate?
3. What is your current runway?
4. What runway do you want to achieve?
5. What actions should you take to achieve this runway?

The first four questions are the easy ones, most of the information to answer these questions are within the control of an organization. The fifth one on actions to be taken to achieve the desired runway is a tricky one, and we put together another set of questions to help the CEO or CFO answer it. These questions are:

1. What are your key revenue lines and how will they be affected? While you can look at this from the monthly or annual sales, this would be the appropriate time to be more granular in your analysis. What actions can you take to improve each line? This may mean strategic shift in what you do day to day, much like the luxury perfume manufacturers that have pivoted to produce hand sanitizer. We think that thinking about your ‘Edges’ and how to go for them is good place to start.
2. If you sell, can you collect, and can you be paid on time? It is important to consider when you will be paid if you extend credit.
3. Looking at your costs, which are the key ones? This is what you incur on a monthly basis. What must you pay today? Are there areas where you can negotiate for a write off, hair cut or postpone payment? This would mean going line by line. Some items like staff costs may not be as flexible but you could negotiate your rent with your landlord.
4. What is your debtors’ position? Who can pay now? Who cannot and would they be able to pay if you gave them a discount? It is important to remember that the same tough decisions you need to make, your debtors are also considering.
5. Who do you owe money? Who must be paid today and who can wait? You need to ensure that your credit rating remains positive. In Kenya, the government has offered some relief in terms of listing defaulters starting 1^st Nonetheless, it is important through all this to communicate clearly, especially with those you expect to wait.

A financial model is the best tool to work through these questions. It is critical to create scenarios because you can use them for your negotiation and planning. Once you have them, you need to pick one scenario and go with it rather than fall into the trap of analysis paralysis. In uncertain times one thing is true, there is never a point where there is perfect information. While most of us prefer working with a full set of information, this will not be available, all the same you need to act now! You can evaluate the scenarios as things change.

If the organization has debt, the above questions alone will not suffice, you need to go deeper and consider how you will service the debt even as you address liquidity concerns at the operational level. This is the time to have a conversation with your lender to ensure the organization does not end up in distress. In the current environment there will be challenges as a result of depressed incomes as well as delayed payments by customers. This means cash conversion will not be optimal. The key focus areas in this case would be avoiding default and conserving cash. They key questions to ask yourself include:

1. How much debt does the company have?
2. What category of debt? This could be senior debt, mezzanine debt, subordinate among others. In our case study we considered senior debt.
3. Is the repayment up to date? It would be ideal if the organization is not lagging at this time as that would help in negotiations with lenders.
4. Does current cashflow support debt service? It would be important to forecast this based on the current situation, assuming the debt terms do not change.
5. Are there any penalties or accrued interest? This forms the basis of the discussion with your lender as far as seeking waivers.
6. What metrics are used to track debt performance? The idea here is to ensure that the ratios agreed to by the lender eg interest cover ratio, debt service cover ratio, debt to equity ratio etc are within the limits set in your debt contract.
7. What does the debt contract say? Review the clauses to know your options. Some of the terms that you could consider negotiating could include an extension of the tenor with the objective being to reduce the monthly repayment. You could also negotiate your interest rate downwards. You can also push for interest and principal moratoriums.

On addressing these questions, your action points could be debt restructuring which helps to reduce the debt burden on your organization. Another action point could be debt consolidation where possible with multiple facilities. This could help improve your cashflow position because you are able to achieve cost of funding efficiency. At the end of the day the best thing you can do is be proactive! You should stress test the business using different scenarios on revenues achieved to see how resilient the organization is and to inform the terms you can negotiate with your lender. Remember the ultimate goal for any organization in these times is to avoid default and conserve cash.

Our detailed webinar exploring these options and the downloadable case study financial model are available here.

Written by Stephen Gugu.