Business and Cash Flow Management During a Crisis

Jess Bozzo: James, I think a good place to start is obviously the coronavirus has created new levels of uncertainty and disruption for every industry. We'd love to hear what are some of the steps you've taken at Euler Hermes to adapt?

James Daly: Thanks, Jess. Well, firstly, I hope everyone out there is safe and getting their businesses in order. That said, you know, in Euler, I think we may have had a little advantage because of our colleagues in Asia Pacific. Obviously, you started to see the effects of the virus there much earlier than we did in the US.

As a result of that, we started to put in place some action plans and some theories around whether this was going to become a pandemic or not. We started to activate a number of policies, although really and truly not fully expecting the severity of the health crisis we’ve all faced now.

But I can still think back to the couple of weeks before the US government and our state (we’re in Maryland) decided to shut down – we had already taken some actions earlier on.

First of all, prior to the shutdown, I remember we asked everyone to stay at home on a Monday morning until around 10 o'clock and activated our remote access to the IT system. We tested to see whether that system would stand such high volume of remote employees. And thankfully, it did.

We have around 500 people working for us in North America. Typically, I think around 450 people access the system at the same time in a given moment. And the network stood up very strongly. So that was fortunate because we did that test before there was a lockdown.

As a management team, we also started thinking early on: “Okay, this is coming. We can see, you know, it’s traveling from east to west. What preparation do we need to put in place to make sure everyone's safe; to make sure that we can function; and to make sure we can have good operational functionality? And how do we work in a dislocated fashion going forward?”

So we had a couple of weeks as a management team to put together a pretty robust plan. And I must say that the plan is working very well.

Of course, we have some IT challenges from time to time when the Internet's overloaded or processes are at full capacity. But generally speaking, I think everything's worked pretty well.

As I said, I think we're a little bit blessed because we had our colleagues from Asia Pacific giving us a sort of early warning and we got ready and everything seems to be working well.

We also reached out to all of our customers to explain how we were going to be operating going forward. And to give us some time to get things into the new way of working, which has been done.

And to be honest with, you know, we're seeing our claims volume start to accelerate pretty aggressively. But that's why Euler Hermes is here – to support our customers in those situations.

Our people are able to manage those claims and get the payments out to our customers on time.

We also recognize that some of our customers are going to have some challenges doing some of the basics, like paying their premiums or accessing their facilities to do the normal routines that we were working with them on.

We've tried to be very collaborative in finding ways to work through the situation. We’ve created “premium holidays” and we’ve put waivers on some of the things that we normally require our customers to do.

And I must say that so far, you know, the way we're working with our clients, the way my team is delivering what we do on a day-to-day basis – it's working very well.

I know there's some tension and some emotion in the way we're all working today across the world. But there's also some funny things, you know? I'm sure we all have those funny emails or conversations about the way the video conferencing platform is working (or isn’t working). Things like that.

I think it’s important that we all make sure we have some fun. Most of my staff, most Fridays, we have happy hours and do something amusing like silly hats or mustaches or whatever.

This crisis will eventually end and we're going to enter a recovery phase. And then, for me, that's the most important piece at Euler Hermes: It’s how do we work and help our customers in the recovery.

You know, you can probably tell from my accent that I'm not from the US; I'm from the UK. And we had a famous leader during the Second World War, Mr. Churchill who said, “When you're going through hell, keep going.”

And I think what keeps us all going right now is the hope that this is going to end soon—Q3, Q4. And this great nation, I'm sure, we'll make sure that we bounce back and really get back to the top of the world as the greatest economy.

Jess Bozzo: Thank you, James. That brings us to the next question. Cash flow predictability is a major pain point for many business leaders right now. What are your thoughts on how finance teams can approach trying to address cash flow concerns during the economic downturn?

James Daly: Yeah, it's a great question, Jess. I think, you know, it goes back to the basics of cash management.

You have to know:

• How much cash do I have going out?
• How much cash do I have coming in?
• Do I have a view on the future cash flow that's coming into the organization?

I know that's going to be extremely challenging right now because a lot of our customers and people on the line, their customers, are probably unable to process payments or they're not going to make those payments.

So really, I think the fundamental here is to communicate.

You need to go out and talk to your customers, talk to your suppliers, and make sure that everyone is completely aware of the situation that you're in. And you build plans together. Because at the end of the day, everyone's going to have to collaborate and cooperate.

I think people need to be accommodating and understand how things are going to work.

Unless you have those conversations, you're in the dark.

So my, my biggest piece of advice is: connect to both sides of your supply chain and communicate diligently and make sure that everyone's understanding the position that you're in.

Unfortunately, Euler Hermes and Allianz Research projected a 25% increase in the number of insolvencies in the US this year. And that's from an increase in 2019 when we did see an increase in insolvencies.

That acceleration of insolvencies is dramatic and we're already starting to see that. Some of the big names in the US economy have already failed. And I'm pretty sure we're going to see some further big names start to suffer.

So you know, unfortunately, Jess, I think there's more bad news to come and we are going to see insolvencies. People are going to have to understand what that impact may be.

So again—if you're not communicating, you're going to receive a shock. So communicate, communicate, communicate.

That's my biggest piece of advice right now for anyone managing their cash.

Jess Bozzo: Oh, great advice. Communication is always important. Perhaps now more than ever. So I guess a follow-up question, James. While we're on the topic of cash flow, is there anything you can share about any accounts receivable trends that you are seeing?

James Daly: Yes. What we're starting to see, the Days Sales Outstanding – DSO – is extended considerably. Unpaid invoices are increasing dramatically. I wouldn't expect anything else. And that's going to put a lot of pressure into the supply chain.

I think also a lot of companies used to use their accounts receivables as a form of collateral in receiving finance, whether that was factoring or receivables finance. That's going to become even more challenging.  And I know a lot of small businesses relied on that form of funding to generate working capital. That's kind of become constrained, I'm pretty sure.

I know the government is providing a lot of support, but it's a little bit patchy. From what we hear, some companies are getting good access to it and other companies are struggling to get access to it. And you know, the first tranche was for small businesses went pretty rapidly. I know that they're looking at the second tranche to be released shortly.

But I think the trends are a little bit worrisome particularly for small businesses on the AR side of things. Which is why Euler Hermes is here; we can provide more insight. We can get more information than perhaps you can individually as a small business.

You know, we still have 500 people, fully operational, out there connecting, trying to assist our customers to understand where that risk in their AR may exist, and hopefully, steer them away from it if we can.

But the temptation right now is to perhaps take some risks that you wouldn't have in prior days, and that could cost you in the short-term. And that's why Euler is here: to provide you with advice and that protection. 

Jess Bozzo: I think the topic of risk is a nice segue to our poll.

[Poll presented to audience]

In response to COVID-19, are you making changes to your organization's risk approach?

• Yes, we are significantly changing our overall risk strategy.
• Yes, we are moderately changing.
• Yes, we are slightly changing
• No, my organization is not changing our overall risk strategy

So please go ahead and make your final selection here and then you can scroll until you see the submit button. All right. What we'll do now is go ahead and take a look at the responses here.

[Poll ends]

Let’s see. It looks like the most popular answer, James, here, a little over 43% is “Yes, we are moderately changing our overall risk strategy” Any thoughts here, James?

James Daly: Yeah, I'm a little surprised. I would have thought that we'd have more select the first one – significantly changing their risk strategy – because really and truly, what to me, the biggest challenge we face now is, yeah, we're right now living in the lockdown and we're managing that lockdown, but we've got to come out of this. It's often called “The After.”

And the way that we look at the world in the office is going to be very different.

I mean, in Euler Hermes, it's our business to analyze data information, to calculate risk. And that's completely changing in the short-term. And so if I have to take a risk on, I have to ask “Do I sell to this company now? Do I sell to this company tomorrow coming out of the crisis?”

The models I would have used pre-crisis as a credit manager or a CFO may have no relevancy.

And so therefore, what data, what KPIs am I going to be configuring to make those risk decisions? They're going to be very different.

So, you know, a little bit surprised, but maybe people are feeling that the world will return to normality more confidently than I do. But I do believe that the world that we face post-COVID is going to be very different.

Jess Bozzo: Thank you, James, for weighing in there. Would love to continue on here. So this recession is different than others because it largely stems from government-mandated shutdowns for public safety. We're all hoping that means a fast recovery. How do you think CFOs can best prepare their companies to start growing again when the recovery starts?

James Daly: That's a great question. I think, again, it goes back to asking: Where is the demand? And you know, unfortunately, there's going to be some companies where that demand is gone and will be gone for some time now.

If your sole business was to provide services into the cruise liners or the airliners six months ago, that demand is probably gone for now. So that's one end of the spectrum. Whereas if you were making paper and sundries packaging, that demand is at unprecedented levels.

As the CFO or the CEO of an organization, you need to understand where you're at, where that demand is in your supply chain. And if that demand is diminished to a point where it's impractical to continue, then you need to adjust your business model to accommodate work, to make sure that everyone's safe.

But unfortunately, I think there are going to be a number of businesses out there that just can't make it.

And that's one of the reasons Euler is here: we're trying to help protect those companies that can't make it and help our customers navigate through this new world.

But, you know, it's going to be extremely challenging. Seventy percent of the US economy is driven by consumers buying stuff. And people are buying a lot less of what they were buying previously and they're buying in different patterns now, and those patterns will normalize.

It's really important to understand how that demand will move over the next 6 months, 12 months, and it's really going to be a journey. And it's going to be difficult to navigate, which is why people and companies like ourselves exist – to help people get through these difficult times, Jess.

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Jess Bozzo: Absolutely. I think that’s a nice place to kind of wrap up and close out. Do you have any closing thoughts or advice for CFO and other business leaders? Anything else you would you would share, James?

James Daly: Yeah, there's the old adage, “Cash is king.” Cash management is going to be a critical. Making decisions that could destroy that cash right now is what should be avoided at all costs.

And you know, as I said before, communicate, communicate, communicate.

Jess Bozzo: Absolutely. Thank you so much, James, for having this great discussion with us today. Really appreciate it.