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A playbook to manage cash in a crisis

The coronavirus pandemic is forcing businesses worldwide to tightly manage their cash. Here are five critical steps to tackle liquidity stress in a crisis.
A playbook to manage cash in a crisis

The shock to the economy from the coronavirus pandemic has been swift and extreme. Full lockdowns closed factories and retail outlets, and work-from-home rules emptied business districts and transport hubs.

Organisations have already initiated operating working capital tactics. They are reducing inventory levels, pressuring customers to settle early, or at a minimum to terms, and stretching payables as far as possible.

This pressure on customers to pay, together with deferral of payables, is irreconcilable across the economy, as the factors are in direct conflict with each other. The outcome is that on a macro-level, the pace of cash movement between trading entities is slowing to a snail's pace. This is in turn leading to conservative trading conditions, where elective spending is cancelled, driving markets into a recessive state.

Without clear direction, paralysis can set in, inhibiting decision-making across all levels of management. An organisation's ability to weather this storm will depend on its capacity to remain liquid until trading returns to normal. There may be contingency plans in motion for revenue, costs, operations, and staffing, but ultimately, they need to be validated by a cash affordability test.

Organisations will consequently look to finance to take the lead. Through implementing rigorous cash management principles, finance can add clarity to plans and steer the business through this difficult period. (See the sidebar, "Prioritising Cash Management", at the bottom of the page, which discusses the importance of planning ahead to respond to a cash crisis.)

5 steps to tackle liquidity stress

There are many practices for managing cash in a crisis, but they all include five critical actions:

1  Forecast

To manage the risk to liquidity, the company will need rolling cash forecasts. The current level of uncertainty suggests a minimum term of at least six months with scenarios mapped out for a range of trading conditions, updated monthly.

Any aspect of the business with enough impact to "move the cash needle" should be forecast in enough detail to allow for both monitoring and action. This forecast will provide a valuable tool for management to visualise the challenges and come to grips with them in a proactive way.

2  Set spend priorities

Using this detailed forecast, leaders can then look at each category of spend and prioritise it based on what provides the business with the greatest level of resilience. Typically, payroll comes first, thereafter key suppliers, and then on to secondary vendors and lenders.

It's important to assess existing debt positions and check covenants before electing to withhold interest or principal payments. Where extensions are required, these have to be pre-approved by the lenders, and variations to terms confirmed in writing. Once the priorities are agreed, a stand-alone approval process should be implemented for all significant items.

Meanwhile, governments across the world are offering relief programmes on tax, payroll, and loans. Where appropriate, these should be built into the payment plans and implemented as soon as they become available.

3  Communicate with stakeholders and staff

Internal and external communication strategies must be drawn up that target stakeholders impacted by the cash plan. Suppliers and creditors need as much lead time as possible if the intention is to break normal payment terms. Similarly, dialogue should be opened early with those customers identified as critical for receipts.

It goes without saying that decisions that affect staff must follow proper channels. Initiatives that change terms of employment must be consulted on and agreed with staff before decisions to implement are made. Where numbers of staff are concerned, this could require collective discusssions involving workers' councils and possibly unions. The earlier these conversations are initiated, the less stressful it will be for those involved.

Post-crisis recovery is a key factor. Transparency and honesty will go a long way to safeguarding business relationships until things return to normal. More communication is much better than less communication when news is bad.

4  Shorten the reporting cycle

Time is the enemy in these periods. Short reporting cycles provide early recognition of actual and forecast deviations, creating greater opportunity for corrective action.

The cash plan will be managed through a simple set of reports, including at a minimum:

  • Daily cash-on-hand reports.
  • Weekly inflow and outflow reviews.
  • Individual approvals for disbursements of significant value — in this regard a low threshold should be set.
  • Monthly reforecasts based on the reviews, looking critically at actual performance with revisions based on the outlook for trading conditions.

Sharing this data widely through the company will demonstrate the importance of cash management and secure commitment to the plan.

5  Plan for low cash points

When low points are identified, specific plans must be put in place to cover them. Operating actions such as reduction of inventory, early receipt from customers, and slower payments should be planned at a detailed level then recorded and tracked as part of the forecast. Thereafter, financing will be required to cover any still existing holes.

Headroom under existing arrangements must be assessed and positions confirmed before they are required to be drawn on. Where new sources are needed, proposals must be put in front of lenders early to avoid putting additional time pressure on the business. It's certainly worth investigating small business government-backed loan programmes, where available, as a potential source.

This basket of actions will not be a surprise to those who have faced liquidity stress periods. They are the steps to be taken when cash is the primary focus irrespective of the cause. There will be times when the organisation needs to consider liquidity as the primary driver, and having a proven playbook ready for implementation creates a base for immediate and effective action.

Andy Gifford, ACCA, is a partner at Falcor BC, an accounting and business coaching practice in the UK. To comment on this article or to suggest an idea for another article, contact Sabine Vollmer, an FM magazine senior editor, at Sabine.Vollmer@aicpa-cima.com.


Prioritising cash management

By Jeff Drew

Ankur Agrawal

Many businesses are struggling to secure enough cash to deal with the economic impact of the coronavirus pandemic.

It’s a challenge that requires purposeful cash management, said Ankur Agrawal (at left), a partner in McKinsey’s New York office and co-author of McKinsey’s recent report, “The CFO’s Role in Helping Companies Navigate the Coronavirus Crisis”. Setting up a war room to drive near-term cash flow implications is very important, Agrawal said.

“What we mean by cash war room is an infrastructure that allows you to rapidly get organised around key cash events, key cash KPIs, key cash metrics,” he explained. Such an infrastructure is supported by a cash culture, which prioritises management of cash-related items, whether it is receivables, payables, outstanding purchase orders, or incoming sales.

Sarah Ghosh, FCMA, CGMA

Liquidity is one of four top priorities CFOs should be focusing on, said Sarah Ghosh, FCMA, CGMA (at right), director and co-founder of Onyx AI and a board member for both CIMA and the Association of International Certified Professional Accountants. The other three are supply chains, workforce, and communication with shareholders.

In reviewing their company’s cash position, CFOs should be looking at ways to retrench cash flow in the short term without eroding assets for the medium and long term. Another key for medium- and long-term success is working with suppliers to keep the supply chain moving as much as possible.

“This may mean supporting them by paying earlier if this is feasible,” she said.

Another challenge is financial forecasting. It will be more difficult to generate revenue projections based on historical data as some key parameters will no longer be applicable.

“CFOs are having to start from a zero base, to determine new assumptions,” Ghosh said. “These current trends are unprecedented, so recent historical trends are not relevant.”

Ghosh said that the Great Recession of 2007–2009 is the closest comparison to the current environment and may provide some insight.

Regardless, CFOs need to create multiple scenarios for financial modelling — and look at the company’s ability to support each one from a liquidity point of view, she said. A potential outcome of what we are learning from these unprecedented times is that companies may look to build up larger cash reserves than they have in the past.

Jeff Drew (Jeff.Drew@aicpa-cima.com) is an FM magazine senior editor. Senior editors Sabine Vollmer (Sabine.Vollmer@aicpa-cima.com) and Drew Adamek (Andrew.Adamek@aicpa-cima.com) contributed to this article.