Few are surprised at the survey results shared by the Commission on Private Sector Development at the end of August 2021, which showed that a significant share of firms were desperately in need of life support, just like severely ill Covid-19 patients
Struggling firms suffer from disrupted cash flows, which rapidly worsen liquidity and breed financial distress.
When cash is king
In finance, the saying “Cash is King” refers to the important role of cash as a yardstick for the liquidity of a firm. Balance sheets can be evaluated via current ratio, acid test ratio or cash flow index. Cash is the most stringent since it has excluded such items as invoices, inventories and other short-term assets.
The pandemic has made cash increasingly important as supply chain disruptions and manufacturing delays triggered by social distancing make items such as payments or inventories far less liquid.
Invoices can generally be converted into cash when used as collateral for factoring. However, during the pandemic, activities like banking are restricted. Invoices become riskier, so many of them no longer reflect the payment capabilities of an enterprise.
Inventories may not help to improve an enterprise’s liquidity, either. As supply chains and business are hampered by social distancing, demand drops drastically, if not going flat.
In accounting books, current ratio and acid test ratio, or quick ratio during the Covid-19 time, may wrongly indicate that a firm is fine when it is actually in trouble. Invoices and inventories cannot be converted into cash to settle short-term payment obligations.
Unfortunately, while revenue shrinks, firms must still settle wages, social security payments, medical insurance, unemployment insurance and trade union fees, not to mention loan payments, rentals and other contract obligations.
When the pandemic swept through Europe for the first time, many governments struggled to provide the necessary systems to fight Covid-19 and help enterprises. Small and medium enterprises were upset, prompting the authorities to reflect and adapt when the second and third waves arrived.
An important lesson gained after more than one year fighting the pandemic is that liquidity and jobs matter.
Many governments swiftly adopt unprecedented measures—including the endorsements of lawmakers, such as quickly passing laws—to inject more capital into firms and minimize financial distress.
Temporary measures have been introduced. For example, some governments shoulder the lion’s share of companies’ wage burden, including social security (up to 80% in France). Governments also back firms to borrow more or restructure their debt. Interest-free loans or grants are offered, especially in hard-hit sectors such as hospitality.
When talking with some entrepreneurs in the restaurant industry in France, the author of this article could feel they were appreciative of the French Government’s help since the second wave of Covid-19. Wage and rental support has partly lessened dissatisfaction with the authorities’ responses during the first wave.
Major cities in Vietnam such as HCMC and Hanoi have gradually reopened but many small and medium enterprises have suffered. According to the survey in August, almost 40% of firms temporarily ceased operations and had less than one month’s worth of money flows; 46% could survive for one to three months.
Recently, the State Bank of Vietnam (SBV) has planned to offer favorable interest rates to firms, with VND100 trillion set aside, but this has not materialized. Time is precious. With every passing day, a firm’s chance of survival decreases. Money flows are vital for companies, so as they dry up, liquidity is needed to revive these firms.
However, interest rates are just part of the pressure. Wage costs, including social security, saddle many firms in Vietnam since various sectors remain labor-intensive and a lot of factories still focus on assembly tasks. Keeping the workforce means huge wage costs, but retrenching them means that recruiting new workers after the pandemic will be a challenge.
Many stakeholders have urged the Government to act quickly to improve the liquidity of firms, especially small and medium enterprises. No companies can endure challenges forever. Some firms, once out of business, will be hard to replace as companies cannot thrive overnight.
The opportunity cost of letting firms vanish, if fully computed, will be enormous. If some policies are beyond the Government’s scope, the National Assembly should intervene to promptly help enterprises.