subjects
cpd types

Treasury KPIs and the COVID-19 pandemic

by Bob Lyddon

Should KPIs for receipt of Trade Receivables go out of the window during a major financial crisis?

The COVID-19 pandemic may be primarily a health crisis, but it has rapidly expanded to become a financial crisis in which the revenues, profits, working capital and even survival of private sector enterprises has come into question.

As a Treasury Manager, setting credit terms for the enterprise's customers is a key component of Working Capital Management, and that includes not just the period of time between delivery and payment, but also the documentation behind the debt, the business process to present the documentation, the reminder when payment is nearly due, and the complex of bank accounts and electronic statements to receive the money and reconcile the debt.

KPIs based on measures such as Days Sales Outstanding threaten to rapidly become meaningless if the debtor has no cashflow, or indeed if debtors stop placing orders so that there are no sales outstanding.

The situation at the time of writing is so extreme and so unprecedented that the focus of Treasury must surely narrow down solely onto ensuring the enterprise's own survival, which means ensuring its liquidity: its ability to meet its own debts as they fall due.

This will be achieved by a mixture of furloughing staff, making use of official support mechanisms (such as the Bank of England's commercial paper facility), and ensuring that the amounts owed by debtors are acknowledged by them as due and payable, even if actual payment has to be postponed. This would be tantamount to extending payment terms, which may feel counter-intuitive but which might result in the debts being paid rather than dishonoured.

Lengthening payment terms when interest rates are near to zero will not have a major carry cost, and may avoid write-offs.

An initial response in the food industry on the part of supermarkets to unilaterally extend the payment terms for their own suppliers by 60 or 90 days will only have the effect of causing those suppliers to go under, and for the flow of supply to stop. Since the sales of supermarkets increased during the crisis and customers pay via cash or card, there is no commercial justification for supermarkets to delay payment to suppliers. Indeed they could shorten the terms.

On the debtor side this will be a judgement call for Treasury, as indicated above: will some degree of forbearance on the timing of payment deliver a higher likelihood of eventual payment, and avoid a write-off?

Trying to manage the situation using a KPI system designed against the certainties that prevailed before COVID-19 might be counter-productive, and the focus should go entirely onto ensuring the enterprise's liquidity.

Bob Lyddon is an author for accountingcpd. To see his courses, click here.

    You need to sign in or register before you can add a contribution.