KPMG urges local biz to explore financial crisis response and contingency planning

Multinational advisory firm KPMG last week advised local businesses to prioritise financial crisis response and contingency planning options since it is unlikely the support measures announced by the government would arrive early enough. 

“While a package of support measures announced by the Sri Lankan government has been broadly welcomed by the businesses, it is evident the cash flow benefit of certain schemes may not arrive quickly enough for some. Those facing a cash crisis need to act quickly on contingency planning options,” advised KPMG in its latest publication ‘Impact of COVID-19 on the Sri Lankan Economy’.

The firm stressed that the level of disruption being experienced across the economy is limiting the effectiveness of certain typical crisis response options, such as an accelerated business sale process. However, it stated that the addition of certain government support measures is raising the opportunity to explore low-cost options for businesses in financial distress, to keep the liquidity and operations ongoing.

According to the advisory firm, when carrying out contingency planning, businesses should take into account cash generation/preservation, limited refinancing resources, government support and forecast cash crunch.

Following a comprehensive contingency planning exercise, KPMG stated that the businesses would be left with three potential options to explore: limited trading in administration, hibernation or full shutdown.

Limited trading in administration would be appropriate for businesses where there continues to be partial ongoing trading, such as retailers with an online revenue stream, delivery as well as physical stores.

On the second option, KPMG suggests that with the support from the relevant stakeholders, it may be possible to place viable parts of the business into ‘hibernation’. The option would involve closing all sites for a period of time, with an exit via an accelerated sale of business at a later point. 

On the final option, KPMG stated that if hibernation is not possible and a solvent wind down is not appropriate, then a full shutdown may be the most suitable avenue. 

“Depending on the nature of the business, a range of insolvency regimes may be considered, including administration and liquidation,” the firm said.

KPMG acknowledged that the potential impact from COVD-19 is unlike any other the country has faced to date and the economy is likely to face a contraction in 2020, due to many sectors being at a standstill.

On the global outlook, the International Monetary Fund (IMF) has announced a global recession, one that is likely to be worse than the financial crisis of 2008.