3/2020 – Time to prepare cash flow reserves

Almost every month I would hear a few cases of friends and a friend’s friends being diagnosed with cancer, mostly advanced fourth stage cases.

Discovery at our age is normally advanced, comes as a shock and requires immediate treatment.

Just two days ago, I was having a chat with my oncologist while in hospital to be fed intravenously my second course of a targeted therapy which has gotten more expensive compared to some six years back.

The regular chemo drugs which has been around for the last 20 years are not too expensive but if you can afford the newer targeted and immunotherapy drugs, go for it as they are less damaging to your normal cells, more effective and causes more tolerable side effects.

My oncologist was very frank with me. Cancer treatment can be very expensive and it could drain your savings if you do not have extensive insurance coverage or a strong cash flow.

I would recommend to the young working adults to buy life insurance with high coverage on critical illness.

Forget about investment linked products and go for plain life insurance plans with a high rider coverage on critical illness to reduce your insurance premiums.

Your savings could be used for your children’s education instead of being spent to prolong your life. Cash flow planning is essential not only for businesses but for personal family matters.

Looking after old parents, having a roof over the head, educating children and planning for the unexpected medical expenses.

Like all businesses, having sufficient cash flow for day-to-day operations is just not enough for the long-term survival of the company as businesses go through cycles of boom and bust.

Saving for a rainy day means increasing your cash reserves during the boom time so that you can ride through the down cycle and the unexpected crisis like the current Covid-19 saga which is still being played out without a solution in sight.

Many industries have been affected by the lockdown in China. From non-delivery of critical parts to manufacturers, to closure of restaurants and shops, complete shutdown of tourism-related businesses from airlines to hotels to travel agencies, the list is endless as once confidence waned, business and consumer consumption drops off the cliff thus affecting the whole economy of a country. This crisis could be over in three months time but by then it would be five to six months into our 2020 business budgets and I would say most businesses would miss their budget forecast by a big margin, some more than others.

Many small businesses will not survive if there is insufficient cash flow to weather the storm.

Companies with heavy borrowings and big wage bills will suffer massively and will require more borrowings or cash injection by shareholders.

Airlines with heavy exposure to China routes will suffer the most.

With heavy borrowings due to high capital expenditure, cash flow from forward selling has trickled down and if full refunds were made for all the cancellations, I wonder how long their cash reserve will last.

Having experienced SARS in 2003, Cathay Pacific was the first airline to react in terms of preserving cash flow.

By asking their 27,000 employees to take a three-week unpaid leave, it could effectively reduce their cash outflow by HK$400mil to HK$500mil in the next two months.

Together with lower fuel cost, the damage to their cash flow reserves might not be as bad.

If the situation does not improved, they will start a lay-off exercise.

In Malaysia, a few industries have called for help from the government.

Hotels, travel agencies have asked for immediate reduction in water and electricity tariffs, banks to help out by stretching loan repayments.

The Finance Ministry (MoF) has had meetings with the affected parties and said that it is monitoring the situation and will make a decision by end-March.

Unexpected crisis requires immediate decision-making. China imposed a lockdown on Wuhan to prevent the virus from spreading. Chinese New Year holidays extended for one to two more weeks. Hong Kong closed schools until March 15. Singapore has taken dramatic steps.

But no government has taken steps to alleviate the cash flows of the small and medium enterprises and the affected businesses. It is during such crisis that Malaysia Incorporated must band together to help each other survive this crisis.

We need immediate decisions both by the government and the private sector to help reduce cash outflows and ensure survival for all businesses.

The MoF must act immediately and not wait 45 more days.

Decisions should not be incubated or it might be too little and too late in saving our economy.

From the government side, a reduction in contribution to the Employees Provident Fund would be a big relief to the companies and put more cash into employees’ pockets.

This has been done before and nothing new.

Our utility companies should support the affected industries by reducing the tariffs for water and electricity. Banks should be more supportive by letting borrowers pay interest only and where possible extend temporary cash line to their affected customers.

Malls should help out with reduction of rental for their tenants for a certain period of time if footfall to their malls trickle down dramatically.

Electricity and water tariffs should be reduced for the mall operators so that they can help their tenants. Traders should not benefit from shortage of protective gear by raising prices. Neither should trading companies make extraordinary profits from shortage of food supplies.

Businesses must look at various options to reduce cash outflow.

For those badly affected businesses, you can be guided by Cathay Pacific’s strategy and ask for employees to take unpaid leave over the next two to three months. Companies could hold back the increments and pay back the staff when cash flow improves.

Cost control measures like reducing electricity usage and office expenses should be in place.

To the young entrepreneurs, this is probably your first global crisis and I can guarantee you that it will not be your last.

You will find that your sales projection will suddenly turn upside down and you will start looking at a shorter cash flow runway. Are you able to make tough decisions on managing your cash flow? Or will you wait and see like our MoF?

Managing cancer and virus epidemic is all about preparing cash flow reserves for the unexpected occurrence that you never thought will happen to you.

Life is full of surprises, most times pleasant and sometimes not so pleasant.

Published: https://www.thestar.com.my/business/business-news/2020/02/17/time-to-prepare-cash-flow-reserves


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