Survival is about being strategic. Company directors and investors that choose to simply stop paying suppliers may be hurting their own post-lockdown recovery, as well as their suppliers.
In this continuing series of articles, we outline the most frequently asked questions by our clients and offer our insights. In this article, we discuss how companies should think strategically about supply chain and furlough options.
Our economy is made up of interconnected supply chains. Companies would be well advised to keep in mind corporate self-interests in the broader context of interdependence across all stakeholders. In respect to managing suppliers, more than ever, a strategic approach is required to balance near-term self-interest and long-term mutual dependence. Companies should identify where existing supply chain repayment time horizons can be used to their advantage. For example, by purchasing from wholesalers on existing 90-day credit and selling on to pre-identified demand and collecting revenues within 90-days, effectively securing free short-term financing. Where existing supplier repayment time horizons are too tight, suppliers may be motivated to agree to an extension to preserve their revenues. Thus, knowing how Covid-19 is directly affecting both your suppliers and your customers can help businesses to strategically navigate the lockdown. By contrast, if too many companies adopt aggressive self-interested positions, the net effect could be worse for all leading to more insolvencies and a weaker post-lockdown recovery.
But decisions between corporate self-interest and mutual dependence are not always clear cut. Some companies may be struggling with corporate moral dilemmas, such as whether to exercise the right to government schemes and protections, when utilisation is not for survival. Directors who do not pay rent because of the eviction moratorium, or furlough staff to save costs and only to delay redundancy, or apply for interest-free loans and grants to paper over the cracks of an already impaired balance sheet, may seem like an abuse of the system which potentially can worsen the recovery for all. On the other hand, directors have a legal obligation to act in the interest of all stakeholders which includes minimising losses wherever possible. So, which obligation is first: the legal requirement to your shareholders, or the moral responsibility the UK government and the taxpayer? One of the challenges of rushing out legislation to preserve the economy is that a one size fits all approach will inevitably allow some degree of exploitation and the answers and appropriateness of company actions are generally not clear cut but are nuanced, particularly given the uncertain timing of any kind of economic recovery.
Company directors have difficult decisions to take over how to prioritise liabilities. The best approach is to consider the near term in the context of potential future customer demand. Making decisions on liabilities only in the context of trying to reduce them is to narrow. Likewise, identifying the interests of the company, without understanding all counterparties is similarly blinkered. This underscores the need for broad communication with all key counterparties will help inform decisions. Learn how your customers see their post-lockdown demand; some may see opportunities out of the crisis which could support confidence in your commitments to your supply chain. Identifying a mutual pathway forward should be the focus. These are different circumstances which require a new rulebook to survive and prosper.
If you would like professional advice to identify the options open to your company in terms of managing your supply chain, please do get in touch.