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 …
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 (3rd 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:
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:
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:
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.