The pandemic in China has given CFOs a wild ride on a ‘V’ shaped recovery rollercoaster. After a steep drop in revenues and expenses in the first quarter, there has been an exhilarating recovery for many. Now, CFOs are asking, what comes next?
Credit risk: the worst has passed …
In China’s industrial sector, MNCs often work with hundreds, if not thousands, of distributors. On the frontlines of any cashflow crunch, these small players are the most vulnerable to economic shocks. Receivables risk remains top of mind for many CFOs. The good news is that the worst may be over in some sectors, although not all. As one CFO remarked during an IMA China CFO Forum meeting,
‘When we look at DSOs [days sales outstanding] in March, we were 16 days over our target compared to last March. Things have improved over the last three months; we are now six-to-eight days over our usual average. We are moving back to normal.’
… Or is the worst yet to come?
Not everyone sees the trend moving in the right direction. Bankruptcies are cropping up, and some CFOs are concerned that a reckoning may still happen.
‘Receivables is our biggest concern. We are having some challenges with bankruptcies and credit and had to book losses on our P&L. We try to cover our credit risk through insurance, but often that insurance gets cancelled.’
Pharma and MedTech firms report difficulty collecting payments from hospitals – a hangover from the months when non-Covid care was put on hold (e.g., elective surgery, dental, check-ups). The rest of the year looks set to be rocky in healthcare.
‘Distributors are having a real problem collecting from hospitals. We expect DSOs to increase in the second half. I will likely have to extend more credit, but I hope it won’t be necessary.’
Meanwhile, Covid’s return could topple players in any industry that is still weak from the first wave.
‘The small spike in Beijing was scary because the Beijing healthcare system is a big part of the national system. But they got it under control quickly. The impact was manageable; we only lost a few weeks. If flare-ups in big cities like Shanghai, Tianjin, and Beijing are avoided, we should have a strong year.’
2019 becomes the benchmark for 2021
A few firms have decided it might be best to forget about 2020 when forecasting for 2021. Some are on track to meet their original 2020 budget, with a strong second quarter making up for a terrible first quarter. Others, however, have found 2020 to be too exceptional and unpredictable to use as a baseline for next year’s forecast.
‘My big concern is what to use as a base for next year because this year is unique. 2019 will become the baseline for next year’s budgeting, but with this extreme situation, we do not have as much marketing, travel, meeting, or training spend. Besides, the government subsidies will end. We need to think this through as we head into next year.’
Nevertheless, some HQs are expecting China to deliver more growth than ever before.
‘We could use 2019 as a benchmark for 2021, and it wouldn’t be a bad story. Yet, this may not be satisfactory enough for the board because it’s not double-digit growth versus the previous year. In the end, this year didn’t drop that much.’
Click on ‘Deep Read’ at the top of the page to learn more about China CFO’s view of China’s recovery.
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