How to develop a financial mitigation plan

22.05.2020 09:14, Isabelle Mitchell

Helge Meichssner’s expertise and experience could have easily filled ten webinars. But even when having to summarize the most critical points about financial mitigation plans in 30 minutes, Meichssner managed to put a complex topic into perspective and provide invaluable advice and a hands-on checklist to help startups weather these uncertain times.

Helge Meichssner—a COO, CFO, and financial adviser—set the scene in her introduction: “This can be an opportunity, so it is important not to overreact. Try to stay calm. Step back. Look at the big picture. This will make it easier to find a starting point.” And she provided that starting point in her webinar. Meichssner gave the participants comprehensive advice to achieve short-term cash improvements and build a starting point for mid- and long-term planning. And we are giving you an overview of her summary.
 

Short-term cash improvement: Include the entire the value chain

Product development

Evaluate development priorities, spending, and investments, but consider the long-term business impact when deciding what can be delayed or cut. Go through any planned or scheduled material purchases (beware of purchase commitments), equipment and software purchases, contracts with external partners, and product features (critical vs. nice to have). Be careful when canceling or delaying regulatory approvals and certifications, as they might affect you in the long term.

Observe the market, and talk to customers, suppliers, and partners to find out if there are any new opportunities: Can you amend existing products or develop new products (quickly and easily) that can help people in the immediate crisis?

Product launch and marketing

Go over upcoming product launches, and decide if they need to be delayed. Review your funding strategy in terms of launch campaigns and their strategic impact.

Assess current and future marketing actions and see if they need any cuts, changes, and delays. Where possible, consider online conferences, remote product training sessions, online meetings, and a focus on online marketing. In case your marketing team has any available resources, use them in customer support to cover immediate crisis topics (i.e., crisis hotline).

Customer contracting and invoicing

Check the credit rating of new and existing customers. If a customer always pays late or the credit rating gets worse, adjust the limits.

Keep your payment terms as short as possible and not longer than 30 days: Use prepayments where possible (especially when you need to pay suppliers). Follow up on all invoices that are more than 10 days overdue. Make sure you send invoices to the accounting department, as your business contact might not be in charge of invoice payments.

Evaluate your agreed-on project milestones. If they cannot be reached, review with customers if interim payments are possible in case milestone achievement is delayed. Talk to your bank about possible bridge funding or an extended credit line since the customer contract provides security.

Supplier products, tools, and machinery

Avoid product shortages by building safety stock for critical components, but manage (semi-finished and finished product) inventory levels and work with suppliers to avoid inventory.

Request extended payment terms, and ensure longer payment terms than your customers’ payment terms—that way, you will get payments from the customers and can pay the supplier.

Validate your logistics routes and find out if there are any issues (e.g., closed borders, stock-outs). If supplies are at risk, involve alternative suppliers. Sell or lease tools and machinery that you do not use during the crisis, and review and negotiate terms for supply shortages. If you need to purchase supplies and machinery, compare prices, and obtain quotes to get into a better negotiation position.

Sales and distribution

Closely monitor the sales channels inventory (e.g., distributors) to avoid stock-up but ensure availability. Go over incoterms, insurances, and force majeure clauses to find out how they can affect payments.

Recruiting and personnel

Review the recruitment plan in terms of necessary hires versus nice-to-have hires. Go over your employees’ vacation days and overtime balances to better plan for the foreseeable future. Evaluate bonus payments, 13th salary, and sales commissions, and negotiate possible delays, but be careful of any legal requirements.

Analyze what hardware, software, and subscriptions you will need to work remotely. In a best-case scenario, you can continue to use the tools after a crisis.

Assess tax payments and request delayed payments, but make sure you return to regular payments after the crisis.

Find out if any of your financial sources are at risk. Avoid cash payments and use credit cards or invoices. If necessary, request an extension of your credit line.

Mid- to long-term planning: Develop scenarios

Use scenario analysis to reinforce an organization’s awareness of uncertainty and provide a range of possible outcomes based on credible sources. Each action in the analysis should help to avoid risks, mitigate risks, transfer risks, accept risks.

Start with defining the drivers and indicators of a scenario, plan for various options, and track the current situation. Make sure you review and adjust the scenarios regularly to strengthen your contingency plan.

Remember these five points when planning for the mid and long term:

1. Protect cash
2. Reprioritize
3. Plan for different scenarios
4. Wear the commercial hat and focus on generating business
5. Embed crisis management into normal business practice