Five steps for managing cash in the COVID-19 crisis

In a previous post, we looked at five key areas of focus for cannabis businesses as they face the economic and operational challenges brought on by COVID-19. As payments are delayed, suppliers push for earlier payment, and credit becomes more difficult to access, we wrote that cannabis companies should focus on monitoring and managing cash flow.

Maintaining a strong balance sheet should be the top priority for companies during a crisis. They should keep enough cash to meet their current obligations while holding enough to invest in future critical operations. In this post we’re expanding on this topic with steps that companies can take to ensure they have the liquidity needed to weather the COVID-19 crisis:

1. Develop cash preservation scenario plans

In our last post, we wrote that cannabis companies should implement dedicated crisis management teams to help them manage this crisis. Those teams should be mobilized to develop a variety of scenario plans that simulate the impact each scenario might have on the company’s business environment, revenues, and access to capital. Companies should plan for at least three scenarios: one that simulates rapid return to normalcy, a second worst case scenario emulating a full recession, and a third that falls somewhere in between the first two. Each scenario plan should specifically identify how an outcome impacts the company’s cash balance going forward.

Based on these, companies should develop a well-reasoned and detailed cash preservation plan. Ultimately that plan needs to suit current needs, but also must be continuously reviewed and adjusted as the situation evolves.
It should balance two priorities:

1. cutting costs and;
2. protecting and enhancing top line revenue.

Depending on the business, the plan should also  take into account variables like product mix, pricing adjustments, and go-to-market channels. 

2. Free up working capital

Companies should assess the capital used to run their day-to-day activities. They should actively rework payment terms to lengthen accounts payable, while at the same time diligently collecting accounts receivable from customers. Where possible, companies should renegotiate supply agreements and look for alternative sources for products and services. 

When trying to free up working capital, companies should also focus on lowering inventory levels. Only minimum inventory coverage should be maintained during this time, and where feasible, unneeded inventories should be returned. Where possible, they should defer interest and lease payments. And finally, companies should use raw materials, converting them into products that can be sold.

3. Slash operating costs

Companies will need to take a hard look at all expenses related to the day-to-day administration and maintenance of their business. They should focus on centralizing key functions and reducing overhead wherever it is possible to do so. 

All remaining resources should either be diverted to areas of the business that generate cash in the short term, or reduced to preserve cash. Training and SG&A should be scrutinized and reduced to a minimum, while research and development should be slowed down or redirected towards producing short term results. On the sales and marketing front, businesses should scrutinize marketing expenditures opting to only spend where it will help with immediate revenue generation rather than on general brand building. 

4. Optimize financial structures

Companies should leverage all financial options to secure as much cash as they can, and as soon as possible. First, they can draw on revolving lines of credit even if it isn’t needed in the short term. Second, they should review all government support programs, such as emergency business loans, and apply as early as possible in the process. Finally, companies can look at renegotiating their debt structures, converting debt into equity, and restructuring other financial obligations where possible.

5. Minimize investments

Now is the time for companies to review all assets and plans for both short- and long-term capital expenditures. Unproductive or non-core assets should either be shut down or divested. Construction and equipment purchasing should be stopped, postponed, or reduced. While stopping all investment programs may jeopardize a company’s future, management should revisit the business case for each investment and apply a higher return on investment threshold. It may be necessary to redefine capital allocation guidelines to sort out what goes and what stays. 

In the coming months, we believe that cash truly is king. We think those companies that will thrive during this time will be the ones that actively manage their balance sheet while cautiously planning for the future. Maintaining a healthy cash position during a crisis may enable them to ramp up activities coming out of it. Moreover, companies that carefully balance cash preservation during difficult times demonstrate leadership, a trait that stakeholders may notice and remember once the storm has passed.

This is not an offer to sell or a recommendation to trade in any securities. This information is provided as of the date hereof. This document contains data obtained from third parties that Canopy Rivers has not independently verified. This document also contains forward-looking information within the meaning of Canadian securities law, which is based on certain assumptions. While management believes these assumptions are reasonable based on information available as of the current date, they may prove to be incorrect. Many assumptions are based on factors outside of Canopy Rivers’ control and actual results may differ materially from current expectations. Forward-looking information involves risks, including, but not limited to, the risk factors set out in Canopy Rivers’ most recent Management’s Discussion and Analysis and Annual Information Form. You should not place undue reliance on forward-looking information. Except as required by applicable law, Canopy Rivers assumes no obligation to update or revise any forward-looking information to reflect new events or circumstances.