Crisis Management - Balance Sheet and FX Management
Published July 28, 2020 by pgalums in
This installment will address the key actions to take during major economic and political crises that impact market sizes, availability of funds and that create a flight to safety ($), thus impacting soft currency countries resulting in high inflation and volatile consumer markets.
By Jose A. Alonso
This installment in the Synfiny Advisors series on crisis management will address the key actions to take during major economic and political crises that impact market sizes, availability of funds and that create a flight to safety ($), thus impacting soft currency countries resulting in high inflation and volatile consumer markets.
As a result of the Coronavirus pandemic, there has been a flight to safety, where investors move to strong currencies, i.e. U.S. dollars, thus resulting in the weakening of developing market currencies of 20-40% as happened to Mexico, Colombia, Peru, and other markets even before these countries were impacted by the virus. Next, we are exposed to closed businesses, low sales, lack of liquidity and reduced consumption. The perfect economic storm.
When faced with a perfect economic storm it results in lower sales, higher local production and operational cost and a devalued currency. Surviving these challenges requires cash – CASH IS KING – and the optimization of the balance sheet to avoid currency risks and to better utilize assets like inventory.
Did you have enough cash to weather the crisis? Do you have lines of credit available? If outside the USA, could you borrow in local currency?
If borrowing is available, that is a great move in soft currencies impacted by devaluation and inflation.
Where are your profit margins after you have been impacted by devaluation?
If your business has a margin of 20%, with a 20% devaluation (Mexico) and a 50/50 local to imported cost structure, you are starting the crisis with a 10% margin, if devaluation is 40%, you are at breakeven.
So, questions to consider when you are facing these cash challenges:
- Do you have a goods ystem tof orecast scenarios for margin and cashflow?
- Once you know what your margins are, do you need pricing?
- How well are you utilizing working capital?
- Receivables – could you collect sooner? If not, create an incentive for prompt payment, offering a larger discount.
- Accounts payable – is it possible to extend payment terms?
- Are you eliminating low moving and unprofitable sku’s?
- Could you avoid hard currency payables?
- Local sourcing – could you avoid importing finished goods, is it possible to locally manufacture?
- Cost savings – is it possible to reformulate? Cheaper products, trade down as there is less acquisition power?
Cash is king in times of crisis. Careful analysis and management of the balance sheet is of utmost importance. Avoid debt in hard currency. Incentives for prompt payment of receivables is a most. Localization in local currency of manufacturing inputs is critical. Careful attention is required to profit margins and cost reductions and or pricing are key in maintaining dollar-based profit margins.
For more information, contact Jose A. Alonso (firstname.lastname@example.org).
Click here for the final part in our crisis management series.