How to restore confidence, in times of crisis

How to restore confidence, in times of crisis

This crisis has brought many awards in almost all areas of activity. Production companies have reinvented themselves in manufacturers of masks and disinfectants, online stores have explosively increased sales for these products that were not of great interest before, the HORECA industry had to pivot to home delivery, tourism stopped, etc. As a positive effect, companies in many industry sectors have reinvented themselves and accelerated their digitization and online presence programs.

The field of financial management has not remained untouched either. The need for quality information restores confidence during times of crisis characterized by uncertainty.

Financial reporting is a reliable provider. New challenges have added to the known challenges in this field. I select three of these here to address them in more detail.

Liquidity risks

It is intuitive for anyone that in times of crisis if you do not have money to access finance operations you close your business. Companies that have a reserve of money to ensure their current activity in the next 6-12 months have a better chance of recovering from the crisis.

Beyond this element, I believe that the power of the team to adapt to the effects of the economic crisis generated by COVID-19 and how it made its presence felt in the economic life of customers during this period could increase a company’s chances of for economic recovery.

On the other hand, the probability that certain material uncertainties would jeopardize the development of a company’s economic activity is very high during this period. Therefore, the preparation of financial documents is done based on the liquidity risk assumption. If a company prepares its financial documents based on this assumption, it should be transparent about its actual financial position.

Depreciation assessment

In their periodic reports, companies also include the depreciation of non-financial assets. In the case of many companies, the suspension of activity by stopping equipment, imports, or exports, transport can be indicators of depreciation.

When assessing an asset’s impairment, companies need to determine the amount of cash that the asset can recover, the benefits and cash it will generate in the future, and certain expectations of a change in cash flow.

The forecast regarding the evolution of cash flow correlates with the management’s estimates concerning the economic conditions covering the estimated life of the asset. In the current circumstances, it is a big challenge to make the budget forecast relevant for the cash flow because you do not know if the actual performance will validate the forecast.

  1. Contract amendments

As a result of disrupted operations, higher operating costs, or lost revenue, as we have already pointed out, the challenges to cash flow are growing. To obtain additional financing, companies can resort to changing the payment conditions from commercial contracts, factoring, bank financing, or inter-company financing.

In cases that change the terms of commercial contracts, companies will need to consider whether any change in existing contractual terms is a substantial change or, possibly, a termination of the contract.

On the other hand, there are consequences for creditors as well. For example, banks and insurance companies should help debtors by providing relief from certain obligations. These will be considered changes to the contract and will make it necessary to re-evaluate the loan portfolio and expected losses. Similarly, real estate companies will have to consider the consequences if they exempt tenants from paying rents.

In conclusion

No matter how unpleasant this period may be, companies must still prepare financial reporting, even if the activity has decreased in some industry sectors. Transparency is needed. Maintaining and restoring trust is vital. The timely discovery of the potential negative effect on the company’s financial position and the activation of risk prevention measures are very important for regaining the trust of all stakeholders in the company.