COVID-19: Managing cash flow for SMEs in crisis

Friday, 24 April 2020

Carl Gunther GAICD photo
Carl Gunther GAICD
Turnaround Management Association Australia

    How an SME responds to a crisis is the number one factor that determines success or failure in turnaround. While many wrong decisions can be fixed, indecision or taking too long to respond can have the most detrimental impact.

    A unique aspect of the COVID-19 crisis is that there is an end-date (arguably, the date of a vaccine but even before then there will be a resumption of ‘new’ normal activities), and this means organisations must plan now for coming through the other side and make decisions today in that knowledge. 1

    In the context of turning around a distressed organisation, effective collaboration between the board and the senior leadership team is paramount. The current crisis and accompanying regulatory reform 2 is both allowing and requiring directors to lean into their organisations more than ever, as they focus on keeping businesses afloat, looking after employees and maintaining relationships with suppliers, customers and financiers.

    In this director tool we focus on some tactics for SMEs in turnaround. If you had an otherwise viable business before COVID-19 there are many response options available, but boards and management must be resolute in their actions.

    Horizons thinking

    The federal government is signalling a period of significant disruption for at least the next six months (April - September 2020). Whether this is the right time frame or not is debatable, but it is clear from the narrative that its fiscal stimulus is designed to impact businesses over a six-month period. Why is this important? SMEs of businesses materially impacted by COVID-19 not only need to consider the critical steps to survive the next six months but they also need to plan now for how their business will be rebuilt after this period.

    SMEs should think about their business in the context of at least two horizons:

    1. Survival – develop plans to get through the next six months;
    2. Rebuild – develop plans to rebuild the business for the new normal.

    Both horizons are equally important. It makes no sense to survive the COVID-19 battle but lose the peace because the business is unable to rebuild. For most SMEs materially impacted by COVID-19, their enterprise value is restored or lost in the future rebuild. This means that decisions made now must be done through the lens of the rebuild to avoid having nothing left when the new normal eventuates.

    Boards should encourage management to do more than just survive (Horizon 1). They should encourage management to do enough so they can also invest in the rebuild (Horizon 2). This often translates when a company must make trade-offs between competing stakeholders. For example, a retailer examining the resumption of trading post-COVID-19 and its store footprint firstly needs to determine how much cash is required and when to restock their most profitable stores in the rebuild. They may delay the return to some sites ahead of others, or perhaps never return to some stores, because of what has happened. Landlords are an important stakeholder. Some landlords are more important than others. How hard they negotiate waivers or deferrals of rent with selected landlords should be driven by how much cash is required to rebuild the store and get it to profitability, not by how much cash is required just to survive the lock down. 3

    It’s important for the board and management to agree upfront which battles to fight when considering such trade-offs.

    Guidelines for horizons thinking

    It is important for board and management to apply the following mindset when developing their organisation’s survival and rebuild plans:

    • No one has a monopoly on the best ideas in a crisis, and staff at all levels will often have good ideas. Ensure there is a way to tap into these ideas.
    • Managing stakeholders is challenging and it is important to consider trade-off scenarios. Hoping that stakeholders will do exactly what is asked is not a prudent plan and a credible alternative should be developed. Also, keep it simple, don’t over promise and don’t commit to a position that is unachievable.
    • Additional debt and equity can be very expensive. Cutting costs, improving margins, releasing cash from working capital is often cheaper and likely to be more controllable.
    • Cutting costs is hard to do. Cutting in a way that is sustainable is even harder to do. It is rare, however, that anyone activating a critical turnaround plan regrets having ‘cut too deep’.

    Changing strategy takes time – changing tactics can start immediately

    Strategy is important but it’s very hard to develop and adopt a new strategy in the middle of a crisis. It’s somewhat like building the plane when you are already in the air! It is better to first focus on tactics to respond to the crisis because the outcomes that result may be very strategic in nature.

    Typically developing a tactical plan in a crisis follows three phases:

    1. Identify tactical options with an emphasis on cash release or cash generation;
    2. Prepare a plan encompassing all identified tactical options;
    3. Deliver against the plan.

    This director tool focuses on the first phase and examines the following ‘levers’ that can provide immediate tactical options for managing cash flow in a crisis:

    • Revenue and/or margin improvement;
    • Working capital release and cost reduction (excluding staff);
    • Staff cost reduction;
    • Other sources of capital or government support.

    Revenue and/or margin improvement

    It is harder to win new customers than to retain existing customers. This is not to say that new customers are not welcome. In fact, with the onset of COVID-19-induced digital disruption, many SMEs are offering new products or services online to new customers. However, when cash is tight and resources are scarce, it makes sense to focus more time on existing customers rather than prospective customers – and on the things that are more controllable rather than less controllable. For example, levers like price, volume and customer interaction/service are more controllable than the results of marketing and promotion.

    Programs directed towards existing customers offering promotions (for example, through online services or bundling based on volume), loyalty programs, exploiting price discrepancies between sales units, or even increasing headline prices and passing through unavoidable costs, are more controllable than investing in finding new customers or new products or new geographies.

    Spend time understanding what it costs to serve (CTS) customers. That is, costs beyond costs of goods sold (COGS) such as warehouse and distribution, customer service and sales support. This enables the classification of customers into Keepers (profitable after CTS), Improvers (potentially profitable after CTS) and Leavers (loss making and likely never to be profitable after CTS). Consider letting go of Leavers in order to reset your overhead cost base (because there are less customers to service).

    Working capital release and cost reduction (excluding staff)

    Never has the adage “know your client” been more important than at a time like this for SMEs. A laser-like oversight of cash receipts collection is critical and for SMEs this should be a daily – but at a minimum, weekly – exercise. Put in place a system of escalation if any customer is more than two days late relative to their terms or commitment date. The Keeper, Improver, Leaver customer classification mentioned above is also useful to apply to payment timeliness.

    If a customer was a poor payer before COVID-19, it is likely they will be an even worse payer now. In the current crisis, it’s prudent to also watch traditionally good payers. The federal government’s announcement of a six-month temporary relief for directors from personal liability for trading while insolvent (from 25 March to 25 September 2020) may result in a disrupted payment pattern from customers. 4

    Consider where your organisation services the supply chain. Are the services essential or critical to customers? Or nice to have? Consider the available levers to get them to pay. For example, is it possible to refrain from releasing work in progress or the next deliverable if the customer is late in paying, even if they are good payers? Consider offering early payment discounts – now is the time for cash, not profit.

    For poor payers, COD may become a requirement. It may also be necessary that they bring their account into line before issuing any more products or services. Many insolvency practitioners are advising clients to delay payment to non- essential/critical creditors by up to six months, particularly those with amounts outstanding of less than $20,000, which is the new minimum limit for a statutory demand. 5

    Finally, if your organisation serves a Business Council of Australia member (who has signed up to the BCA supplier payment code) – or local, state and federal government agencies – consider asking for early payment.

    Creditors are likely to examine your organisation in much the same way you are examining your own customers. Communicate and ask for extended payment terms and reductions in cost. Keep promises and don’t over commit.

    Offer discounts to Keeper clients to sell excess inventory. Consider varying minimum order quantities, safety stock levels and lead times to reduce your investment in inventory and other hold costs.

    Don’t forget to consider closing permanently or mothballing temporarily unprofitable sites, business units or branches, or at least sharing common costs to support a wider distribution network.

    It is worth noting that cost reduction programs in SMEs mostly fail to achieve 100 per cent of their targets. This is especially the case for sustainable targets. With this in mind, cost reduction targets should be set to exceed what is required to survive.

    The AICD webinar recording Turnround Fundamentals provides general guidance on cost out and working capital tactics. 6

    Staff cost reduction

    After the safety and wellbeing of employees, the most important staffing priority for SMEs is to focus on both keeping employees and finding ways to lower their cost base. These may include measures such as securing voluntary pay reductions, roster changes, freezing of new hires, winding down leave balances and managing stand downs. It is critical that employees and employers work together to find the right solution for their organisation. 7

    If an SME finds itself having to consider redundancies, particularly when considering rebuild (Horizon 2), it may be useful to classify full-time employees into three categories:

    1. Employees most closely related to the output of product or services (for example, front line staff);
    2. Employees supporting the first category;
    3. Senior management and indirect functions.

    Use this classification to focus redundancies away from category 1 towards redundancies in categories 2 and 3. By doing so, the organisation preserves as best as possible those FTEs most closely working with clients or on the front line. When the rebuild plan is activated, the organisation can pivot and respond because it has retained (as best as possible) the front line workforce capacity to do so. Cut casuals before permanent staff; cut back office permanent staff (categories 2 and 3) before front line permanent staff.

    Finally, if you find that your organisation’s operating model needs to be reset (that is, because there are less customers to service), identify what roles are required first and then consider who would best fulfill those roles.

    Other sources of capital or government support

    The federal government has issued a significant range of financial and operational assistance for businesses impacted by the COVID-19 crisis. 8

    Private equity and traditional bank debt lenders are also being supported through federal government initiatives. One such initiative is $15 billion to enable smaller lenders to continue supporting Australian consumers and small businesses. 9

    Arguably the most significant initiative to date is the $250,000 ‘unsecured’ loan offered by the federal government but distributed through the banks. 10 Each bank is managing the loan scheme slightly differently. The banks have been inundated with applications and for this reason it is preferable to access the loan though an existing relationship rather than approach a new bank relationship.

    Loan application terms and security frameworks also differ from bank to bank and a number of non-traditional lenders have been granted access to the scheme. In addition, banks are doing more than just offering the $250,000 unsecured loan, with many also pausing and deferring existing loan repayment programs.

    Recognising that additional debt and equity can be very expensive, it is important for SMEs to sweat their balance sheet assets harder. There are a number of excellent asset backed lenders that provide working capital debt, and most will work with incumbent banks to make available the release of debtors or inventory from their security. Some asset backed lenders will release up to 85 per cent of the invoice value, for invoices aged less than 90 days from invoice date.

    From time to time, SMEs may have a valid litigious claim against a third party and rather than cease proceedings because cash is tight, litigation funders may be a legitimate way of funding the proceedings. Litigation funding financiers will lend against purchase assignable claims. They will fund a debt owing or a right to sue for damages under a contract (provided the contract does not contain a restriction on assignment).

    Finally, SMEs are increasingly looking to sell and lease back new, existing, and aged plant and equipment. Combined with the government depreciation benefits announced in their second relief package, this can be a two-stage benefit.

    A final note

    A key consideration for SME directors facing the COVID-19 crisis is to quickly establish what the survive-and-rebuild landscape look like for their organisation. Many wrong decisions are fixable, but indecision or taking too long to decide can have the most adverse impact in a crisis.

    Equally important, changing strategy may take time but changing tactics can start immediately and the most immediate stabilising tactic needs to emphasise cash flow:

    • Cust costs to survive and earn the right to invest for the future;
    • Cash is king – sweat the balance sheet;
    • Understand duty shift and when dealing with stakeholders document clearly what has been agreed.


    1 A Cornell, 2020, “Gonski: keeping an open mind in crisis”, 19 April, bluenotes,, (accessed 20 April 2020).

    2 AICD, 2020, COVID-19: Shifting regulatory landscape, 2 April,, (accessed 21 April 2020).

    3 Refer to the following COVID-19 guidance for landlords and tenants:

    Australian Government, 2020, National Cabinet Mandatory Code of Conduct: SME commercial leasing principles during COVID-19, 7 April,, (accessed 21 April 2020).

    S Dempsey, 2020, COVID-19: Can your business get rent relief?, 31 March, AICD,, (accessed 21 April 2020).

    4 AICD, 2020, COVID-19: Shifting regulatory landscape, op cit.

    5 Australian Government, Temporary relief for financially distressed businesses, Economic Response to the Coronavirus Fact Sheet,, (accessed 21 April 2020).

    6 C Gunther, 2020, Turnaround Fundamentals, [webinar recording], AICD,, (accessed 22 April 2020).

    7 Refer to the following COVID-19 guidance on workplace remuneration:

    D McElrea, 2020, Navigating workplace relations through COVID-19, 26 March, AICD,, (accessed 21 April 2020).

    C Robinson, A Lyras and H Ormandy, 2020, JobKeeper Scheme: What directors need to know, 20 April, AICD,, (accessed 21 April 2020).

    8 Refer to the following COVID-19 guidance on workplace remuneration

    Australian Government, Coronavirus information and support for business, [website],, (accessed 21 April 2020).

    9 Treasurer of the Commonwealth, 2020, Government to invest up to $15B in support of SME lending, 19 March,, (accessed 21 April 2020).

    10 P Ryan, 2020, Major banks to offer $250,000 loans to small Australian businesses, ABC AM, 23 March, [transcript],$250,000-loans-to-small-australian-businesses/12080356, (accessed 21 April 2020).

    About the author

    Carl Gunther GAICD retains several NED positions and is past National Turnaround Lead for KPMG Australia. He has over 25 years financial and operational restructuring experience in assisting companies and boards develop turnaround plans that make meaningful change within the first 60 to 90 days and provide a roadmap for stability. He is President of the Turnaround Management Association Australia.

    About us

    The Australian Institute of Company Directors is committed to strengthening society through world-class governance. We aim to be the independent and trusted voice of governance, building the capability of a community of leaders for the benefit of society. Our membership includes directors and senior leaders from business, government and the not-for-profit sectors.

    For more information: 1300 739 119

    This document is part of a Director Tool series published by the Australian Institute of Company Directors. This series has been designed to provide general background information and as a starting point for undertaking a board-related activity. It is not designed to replace a detailed review of the subject matter. The material in this document does not constitute legal, accounting or other professional advice. While reasonable care has been taken in its preparation, the Australian Institute of Company Directors does not make any express or implied representations or warranties as to the completeness, currency, reliability or accuracy of the material in this document. This document should not be used or relied upon as a substitute for professional advice or as a basis for formulating business decisions. To the extent permitted by law, the Australian Institute of Company Directors excludes all liability for any loss or damage arising out of the use of the material in this document. Any links to third-party websites are provided for convenience only and do not represent endorsement, sponsorship or approval of those third parties, or any products and/or services offered by third parties, or any comment on the accuracy or currency of the information included in third party websites. The opinions of those quoted do not necessarily represent the view of the Australian Institute of Company Directors.

    Latest news

    This is of of your complimentary pieces of content

    This is exclusive content.

    You have reached your limit for guest contents. The content you are trying to access is exclusive for AICD members. Please become a member for unlimited access.