Brazil: Coronavirus as a stress test for liquidity

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published on 8 April 2020 | reading time approx. 2 minutes

  

Measures to control the spread of Coronavirus are currently keeping many companies around the world literally in panic. Therefore, it is even more essential to be constantly aware of the liquidity situation of the company in order to identify short-term bottlenecks and to be able to take immediate counter-measures in the event of an upcoming emergency.

  

   
How we can estimate the development of liquidity:

  • With the help of financial modeling and integrated financial models, companies can simulate their specific liquidity situation in the short and medium term.
  • Especially in the case of an economic crisis like this, so-called stress tests should be simulated using scenario and sensitivity analyses.
  • A stress-test should show when and under what circumstances the company's liquidity situation might become critical.
  • The advantages of such a simulation are that CEOs and CFOs can make well-founded decisions on how to proceed in the crisis.

 

  

Methodical procedure

  • An individual financial modeling of the current liquidity status should reflect the weekly liquidity situation over a period of at least three months, which shall be updated on a regular basis (i.e. weekly).
  • Current financial status – Which amount of cash and cash equivalents, reserves and credit lines is offset by due liabilities.
  • Incoming and outgoing payments in the near future related to operating business as well as investments and financing activities must be recorded in order to obtain available liquidity in the near future.
  • Depending on the size and complexity of the business, a simplified or more detailed financial model solution should be implemented.

 

Weekly plannung

1. Balance sheet items
2. Income statements items

 

Derivation of the cash flow statement:

Cash flow from operating activities
Cash flow investment activities
Cash flow from financing activities

= RECORDING FINANCIAL STATUS

 

Accurately fitting model specifications 

 

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