Tong Aiqin, Associate Professor of Tongji SEM

May 2, 2020

On the eve of the 2020Spring Festival, a pneumonia epidemic caused by novel coronavirus swept across China. Through the joint efforts of the Chinese people, the epidemic has been brought under control domestically. What is particularly worthy of attention at present, is that this sudden crisis of the global public health sharply cooled down the heat of economic activity, which may lead to a drastic decline in economic growth over a period of time. From the public cry for help by the boss of Xibei Youmian, a Chinese chain restaurant, to the nearly bankrupt “King of Karaoke”, a KTV in Beijing, the business crisis caused by the epidemic creates huge impact on many SMEs. From the financial aspect, this impact is mainly resulted from the severe constraint of cash flow. In times of emergency, how to defend cash flows?

Cash flow refers to the amount of inflow and outflow of cash and cash equivalents of an enterprise in a certain period. Cash and cash equivalents meet all the following four conditions: short term, strong liquidity, easy conversion to known amount of cash, and low risk of value change. Therefore, cash flow is the “blood” in the maintenance of the company’s daily activities of production and operation.

In times of emergency, how to maintain sufficient cash flow for enterprises? It can be discussed from two aspects: the governmental side and the corporate one.

1. Defend the cash flow on the governmental side
2. Pay close attention to the resumption of production

The epidemic is basically under control domestically. With all preparations made to ensure the health and safety of the company’s personnel, the competent government department of the companies should actively guide and ensure the orderly resumption of each company. By removing the blocked spot in the industrial chain, government can guarantee the production and the capital flows, so as to inject vitality into the economic system.

1. Strengthen financial support for SMEs

Local governments should reduce taxes and administrative fees in accordance with the actual conditions of the local economic structure, employment, etc., and promote the introduction of property rent reductions, periodic deferrals or appropriate reimbursement of social insurance premiums, deferred tax payments, factor cost reduction, subsidies for skill training of enterprise staff, rewards for job stabilization, and other financial support policies to reduce the cost burden of SMEs. At the same time, the government is encouraged to increasingly bias the procurement in favor of SMEs and settle the payment as soon as possible.

1. Increase financial support and preferential policies for SMEs

It is easy for large or well-known enterprises to obtain loans from banks, but SMEs are facing greater financing constraints. Local governments should coordinate banks to conduct research and investigation. For SMEs of high-quality but with little cash flow, banks should relax the restrictions for loans with lower interest rates, and more credit loans and long-term loans. Manufacturing enterprises have less room for maneuver when encountering cash-flow problems, and need longer time to restore production capacity. If a large number of manufacturing enterprises collapse, we may see the outflow of manufacturing orders, affecting the domestic industrial structure. The country should therefore consider providing more favorable concessions for SMEs in manufacturing in the future, in order to encourage the economic structure to shift from virtual to real, and promote the rational allocation of resources.

1. Defend the cash flow on the corporate side

Corporate cash flow is mainly divided into cash flow in operating activities, investment activities, and financing activities. Based on these three types, it is possible to analyze the countermeasures for companies to “defend the cash flow”.

1. Cash flow in operating activities: increase income and reduce cost

Enterprises can free cash flow in operating activities in terms of “cost reduction” and “income increase”.

Enterprises should try their best to reduce expenses and consider negotiating new compensation plans with employees. Negotiating with enterprises in the upstream and downstream of the industry chain, enterprise should strive for longer time limit on payment and shorter period for receivables. After the resumption of work, enterprises can consider working from home to reduce expenses of commuting, and office cleaning and maintenance. Since the epidemic, the government has issued a series of policies involving taxation, social security, administrative fees, and subsidies. Taking Shanghai as an example, in March, various functional departments like the Human Resources and Social Security Bureau, the Finance Bureau, and the National Development and Reform Commission issued notices on the reduction and exemption of social security, and the reduction of electricity and gas charges for enterprises to support the work resumption. Enterprises should pay close attention to the new policies issued by the central and local governments, and make good use of them to save money for themselves.

At the same time, according to their own characteristics and the requirements of epidemic prevention and control, enterprises need to find a way out for their own business to increase cash inflow from operation. For example, restaurants shifting from dine-in meals to takeaways can directly sell the unprocessed ingredients that are unsaleable due to the epidemic; hotels and B&Bs can consider turning short-term rentals to long-term ones; qualified hotels can cooperate with governments to provide quarantine area for confirmed cases and medical workers; the tourism industry can provide online tour guide with live-broadcasting platforms; automobile companies may provide services like used car transaction, and parts replacement and maintenance.

2. Cash flow in investment activities: survive with a broken arm

Cash outflows in investment activities mainly involve investment activities within or out of the enterprise, including the construction of new factories and production lines, and the purchase of securities; cash inflows are derived from the income and the disposal of assets. During the epidemic, enterprises should stop investing and keep cash flow in hand. Assess whether the daily income of the assets can guarantee the cash flow. If not, enterprises can “cut off one arm to survive”, including selling some idle factory equipment, and disposing of some non-critical assets to obtain cash for survival.

3. Cash flow in financing activities: innovate financing channels

In addition to obtaining finance according to relevant financial support policies formulated by the government, enterprises should also try to innovate financing channels within the law to gain more cash flow from financing.

For enterprises with good expected returns in the normal operating environment in the future, they can pledge the right of income for short-term funds; for companies with high-quality customers, they can transfer the right of income of the receivables. For sci-tech SMEs with large proportion of intangible assets, they can ledge their patent and copyright to raise bank loans. These methods are to use the future cash flow in advance to ensure the current survival of the enterprise.

For enterprise having large enterprises in its upstream and downstream industry chain, entrusted loans can be introduced for these large enterprises long cooperating with the enterprise are equal to banks in terms of offering audits and loan guarantees for the enterprise; for companies with heavy assets that lock up large number of capital, they can acquire large cash flow by renting back the assets after selling them, in order to pay less cash for the normal use of the devices while the value of the capital can increase in the flow of funds; enterprises need to plan the account period reasonably to reduce receivables and increase advance payments to shorten the capital turnover cycle and improve the efficiency of capital operation.

Through this epidemic, the enterprises have been alerted to make strategic changes in the future in addition to supplementing cash flow through the above tactics. The changes include the transformation from companies with “heavy asset ” into “light asset” through selling assets ; forming “strategic alliance” among manufacturing companies to extend from the manufacturing to both ends of the value chain, and cooperate with other companies in R&D, design, after-sales service, maintenance, etc.

Indeed, the COVID-19 epidemic has a huge impact on SMEs, but enterprises can defend the cash flow with government support and effective financial control.

references

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[2]https://www.welinkdata.com/news/3765.html “What are the innovative financing channels? 》

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