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Accounting and Finance Describe the budgetary process used in your company. Special mention would be given...

Accounting and Finance

Describe the budgetary process used in your company. Special mention would be given on how your company handled their budgets during the Covid-19 pandemic

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Answer #1

1. ADAPTING INSTITUTIONS AND PROCESSES

The budget preparation process will require increased attention to institutional aspects andoperational constraints linked to the COVID-19 context.

The strategy-setting

  • The strategy setting stage will provide a first opportunity to reassess the impact of these measures and to start planning to bring public finances on a firm footing
  • It is important to have a well-drafted budget circular as early as possible to guide budget submissions. The greater the uncertainties, the greater the need for all actors to have a clear grasp of the tasks and the challenges at hand. The circular should clarify processes, timelines, roles of actors and provide templates and guidance on budget submissions. It should capture the main messages about the nature of fiscal constraints and the increased need for reallocations and savings.
  • Setting up contingency/reserve envelopes. To address emergency spending needs or revenue shortfalls, a contingency envelope (for example, based on the need for policy responses if the worst-case scenario materializes) managed by the MoF (with clear guidelines on access) could be a possibletool. This mechanism increases governments’ capacities for swift reaction to sudden shocks, however, it hands significant powers to the executive.

2. Ensure you have a robust frameworkfor managing supply chain risk. Supply chain management is a complex challenge, and finance-related problems only add to the risk.

3. Ensure your own financing remains viable. In these circumstances, don’t assume the financing options you previously had available to you will continue to be available. Undertake scenario planning to better understand how much cash you’ll need and for how long. Use this opportunity to actively engage with your financing partners to ensure your available lines of credit remain available, and to explore new or additional options should you require them.

4. Focus on the cash-to-cash conversion cycle. Under normal business conditions, companies primarily focus on the profit and losses–growing the top line while managing the bottom line. Routine back-office activities such as paying bills and turning receivables into cash are often taken for granted. In the current abnormal business conditions, smart companies are shifting their focus from the income statement to the balance sheet.

5. Revisit your variable costs. Reducing your variable costs is often a quicker way to immediately reduce your cash outflows than focusing on your fixed costs. Of course, there are the typical variable cost-reduction levers, such as imposing travel bans and non-essential meeting restrictions.

6. Revisit capital investment plans. With cash flow forecasts in mind, consider what’s really necessary for the near term.

7. Focus on inventory management. Companies are at risk of experiencing supply chain disruptions due to shortages in raw material and component parts. Inventory safety stock parameters will most likely need to be updated to reflect the increased demand and supply-side volatility, which will have the effect of increasing overall inventory levels, assuming that’s possible.

8. Extend payables, intelligently.One way to preserve working capital is to take longer to pay your suppliers. Some companies may unilaterally decide to delay their payments and force the extension on their suppliers, especially when stuck with inventory they can’t deliver into impacted margins. Of course, such an approach is likely to damage your supply relationships. Even worse, it might deprive supply chain partners of the cash they need to maintain their operations, which could lead to late deliveries and quality problems, never mind the added strain to supply relationships.

9. Manage and expedite receivables. Companies tend to get lax about receivables when the economy is booming, interest rates are relatively low, and cash flow is not a concern. But, as supply chains are affected and managing cash flow becomes more important, it’s worth taking a hard look at how your receivables are being managed. In the point above, we mention the strategy of delaying payments to your suppliers; don’t be surprised if your customers are thinking about doing the same thing to you. That’s why it’s important to improve the rigour of your collection processes.

10. Consider alternate supplychain financing options. Depending on what your cash flow scenario planning reveals, you may also need to consider tactics to generate faster cash flow from your receivables. Aggressive techniques such as factoring your receivables, although relatively expensive, may be your best option to improve cash flow quickly. You may also consider working with your customers to offer dynamic discounting solutions for those that are able to pay more quickly (e.g., discount terms can be defined in advance, and the customer calculates the appropriate discount based on a defined payment schedule). With this technique, you are essentially paying customers to provide you with short-term financing.

11. Audit payables and receivables transactions. Make sure you’re paying the right amount for the goods and services you procure and collecting the right amount for goods and services you sell. On the payables side, double-check that you’re not overpaying duties and taxes on purchases, especially as alternate international supply locations are used to keep supply chains running. lso, if you have the cash flow to support it, make sure you’re taking full advantage of all available discounts. On the receivables side, look for situations where unearned discounts were applied and then aggressively pursue the proper payment.

12. Understand your business interruption insurance. Companies should understand existing business insurance policies and the coverage they have in the event of a significant business disruption. Such insurance generally covers losses arising from disruptions to a business’s customers or suppliers. However, the breadth of coverage can vary significantly by insurer policy, industry sector, and geography.

13. Consider alternate ornon-traditional revenue streams. If your scenario planning is showing pressure on your continued revenue streams, consider ways you could temporarily or maybe even permanently replace that revenue.

14. Convert fixed to variable costs, where possible. In times of uncertainty, it’s generally a good idea to swap fixed costs for variable costs wherever you can–preserving your core business while increasing your flexibility on the fringes. Selling assets and then leasing them back is one way to raise emergency cash. You might also want to consider expanding your use of practices such as contract manufacturing, transportation fleet leasing, and third-party warehousing. This is not likely a quick-hit measure for most companies, but may be important to longer-term cash flow management, depending on how long demand and supply chains are disrupted by COVID-19.

15. Think beyond your four walls. To maximize working capital, you can’t only focus on your own operations and inventory levels: you need to think about your entire ecosystem and supply chain. Squeezing inventory out of your operation may not do much good–and could in fact introduce significant risk–if it just shifts the burden to a supplier or customer. The same is true for payables and receivables. It’s important to carefully consider the upstream and downstream impact of your actions. High-level financial risk assessments should be conducted on any critical, sole-source suppliers to identify issues before they become problems. In extreme cases, if a critical supplier is at risk, you might even need to buy a stake in the company or acquire the business outright to protect your supply chain and keep your goods and services flowing.

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