Corporate Finance and the Light at the end of the Tunnel
The emergence and spread of the Covid-19 caused one of the largest exogenous shocks in the history of the world economy.
The pandemic and the related economic downturn created new challenges and unprecedent financial circumstances that corporate finance leaders had suddenly to face and address.
The response that the finance teams give to all these challenges can have a significant impact on how companies emerge from the economic crisis.
In a period of great demand, Colquímica Adhesives’ team has been paying extra attention to the following financial areas:
1. Managing cash and liquidity
In order to mitigate liquidity risk, we have kept in mind some of its most relevant causes. We have been assessing the potential for changes to our cash conversion cycle based on the current environment’s impact on our suppliers and customers.
We have also been considering changes to working capital practices (including inventory management) with a focus on business continuity.
In addition to carefully planning its funding needs, Colquímica Adhesives maintains a liquidity cushion in the form of credit lines obtained from its relationship banks, to ensure the ability to meet all its commitments without having to borrow under unfavorable conditions.
Net bank debt structure is an important subject to keep in mind. Medium long term bank debt should be considered, when facing a structural net bank debt for the medium long term.
Fortunately, we are not considering renegotiating and restructuring loans and loan covenants, but we are aware that this framework may be the reality for many companies, in case that potential issues are uncovered in the financial scenario modeling.
2. Exchange rate management
In 2020, we faced volatility in the exchange rate markets. Our transactions are made in different currencies. Colquímica Adhesives has plants in Portugal and Poland. Our strategy to mitigate accounting and financial exchange rate risk consists in hedging some transactions (purchases/sales) and to minimize transactions and balances in currencies different from the functional currencies adopted in each plant.
Finally, we adopt International Financial Reporting Standards (IFRS) in the consolidated accounts. They allow us to mitigate accounting exchange risk in P&L, to some circumstances.
Many companies are used to dealing with impairment issues for goodwill, stocks and customer receivables, but all assets should be assessed for impairment.
We are aware that estimating cash flows for valuations is a very difficult task in the current social and political framework, given the uncertainties of the mitigation measures, timing of the restrictions lifting and the subsequent economic recovery.
As far as impairments are concerned, prudency and caution must be part of every single decision.
This pandemic may oblige some companies to abandon investment decisions or even sell some of their assets (such as fixed assets, companies, etc.). Doing lease-backs as well as selling with call-options might be rational economic decisions. They must be assessed keeping in mind the binomial threats - opportunities.
Colquímica Adhesives faces the future with enlightened optimism. We perceive opportunities and we will continue to invest. The economic recovery is taking place in the near future and we will be ready to capitalize it, with our human and physical capital.
We are focused on Innovation. Our investments are and will be channeled towards Innovation, in a broad sense.
5. Internal controls
As many companies are learning to function in a remote and digital environment, they are facing unique internal management issues. Certain individuals may not be able to perform their usual controls because they are sick, a family member is sick, they are home schooling their child, or they have not internet access and cannot work from home.
Moreover, an increasing number of companies are suffering hacker attacks.
The Finance function and the IT function have to be very well aligned to keep operations under control. Internal control analysis should be intensified.
This is an area where external auditors can give some support. Effective communication within and with them is capital.
6. Tax and financial incentives
There has been Governments’ support for some companies/operations during the covid-19 pandemic. Corporate finance teams must be informed about the new tax incentives and/or new financial incentives, if applicable.
Tax consultants should be contacted. It is advisable to improve training in tax and financial incentives and recommended to stay in touch with a good networking of certified accountants as well as financial managers.
7. Digital Transformation
One of the big trendy themes in finance is digital transformation. One of the best places to start is invoice digitalization. An invoice is a dated and addressed list of goods or services, with pricing and tax details. The digitization of this invoice allows for the information to support automated processes. The digitization of an invoice unlocks the information within the invoice. This information can then be used in many different ways to support Accounts Payable, Accounts Receivable, and many different reporting uses.
With digital transformation, finance professionals change their positioning within their organizations. They are less and less seen as occupying back-office roles and more as professionals who support business efforts. The success of this process is critical in a world where data volumes are increasing at a dizzying rate.
In-person events, trainings and meetings were once the norm and virtual meetings the exception, but Covid-19 has flipped those scenarios. The pandemic influenced the emergence of the distance economy or business activities that do not rely on face-to-face activity.
On the one hand, the traditional budgeting process is rarely justified in today’s covid, fast changing and uncertain environment. Some people consider budgeting a static process, largely concerned with negotiating spending and revenue targets. On the other hand, planning is an ongoing dynamic process that reviews and revises forecasts and assesses a range of contingencies.
Planning is about improving performance and reducing risk. It is about optimizing spending, not just minimizing it, so that strategic priorities are last on the list of cuts.
In my opinion, there’s never been a better time to make this shift than now: today’s Covid-19 business environment is unforgiving of mistakes and demands that companies must be smarter and nimbler about allocating resources.
Last but not least, embracing next-generation KPIs that emphasize customers, products, growth, workers and the future is clearly a challenge that will increasingly decide enterprise success.
9. Creating Value
At Colquímica Adhesives, we are adopting Value-Based Management, which is a management system that articulates three components:
- evaluation of the company's performance in terms of value creation (Economic Profit, Free Cash Flow, etc);
- support for decision-making that may have impact on the creation of value;
- incentive system that adequately rewards performance in terms of value creation.
In 2020, mankind faced a huge health and economic challenge, due to the spread of Covid-19.
In 2021, we will have massive vaccination. Vaccination will be a major “economic” policy instrument Governments will have to boost the Macroeconomy.