A playbook to manage cash in a crisis

The shock to the economy from the coronavirus pandemic has been swift and extreme. Most organisations are dealing with the consequences of the response to the virus, rather than the virus itself. Full lockdowns have closed factories and retail outlets with work-from-home rules emptying out 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 spend 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 principals, finance can add clarity to plans and steer the business through this difficult period.

5 steps to tackle liquidity stress

There are any number of 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 at 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 with 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. Communication. 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 staff impact must follow proper channels. Initiatives that change terms of employment must be consulted and agreed with staff before decisions to implement are made. Where numbers of staff are concerned, this could require collective action 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 for 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 surprise those who have faced liquidity stress periods. These are the steps 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.

For more news and reporting on the coronavirus and how management accountants can handle challenges related to the outbreak, visit FM’s coronavirus resources page.

— 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.