Managing cash flow during a global crisis
There has been much discussion about the opportunity for ‘the next pandemic’.
While it was worrying, I don’t think the majority of the global business community anticipated the level of disruption brought about by COVID-19. Recall the impact of Ebola, SARS, HIV, H1N1 or Swine Flu. They were very dangerous, there was a terrible loss of life and associated impact on people’s families, yet national economies were not shuttered, the world’s airlines were not parked and millions of people were not put out of work. In this way, the COVID-19 global pandemic is unique in our lifetime. Companies are facing an unheard of liquidity crisis as businesses are forced to close, workers are laid off, demand for goods and services drops, and associated cash flows dry up.
Cash is king
As operations shutter, business restrict activities, fleets are parked or grounded, and folks wait for the all-clear to get back to work, an old saying is truer now than ever before:
“Revenue is vanity, profit is sanity, but cash is king”.
Some folks think that this phrase was first used in connection to the financial crash of 1987, as many companies with substantial cash reserves weathered the storm far better than organisations with less liquidity. Revenues on their own demonstrate little with regard to the overall health of a business—they are merely a promise of payments to come. Profit is the anticipated revenue remaining after all costs are paid out. Cashflow—actual positive cash received by a company minus the cash paid out for materials, equipment, labour, etc.—demonstrates how healthy a company is.
Your organisation may have entered into contracts worth $200m, and correctly recorded the revenues for those contracts as booked revenue, but if 75% of your customers are unable to pay due to the impact of the COVID-19 pandemic, you won’t be able to pay your employees or satisfy your creditors with those contracts.
Cash management planning
When some something significant disrupts a company and puts their cash flow at risk, they need to act quickly with a plan to manage cashflow. Conserving liquidity without doing any long term damage to your business is the key objective. Organisations need to develop a “Cash is King” culture throughout their entire structure. Recognising the issue early, taking quick action, and utilising an organised and coordinated process will greatly assist in managing restricted cash flow in the near future. Companies need to:
- Immediately communicate to the organisation that circumstances have changed and that cash will be conserved as much as possible.
- Revalidate all cash projections and shorten internal reporting cycles to stay on top of their cash position.
- Defer all discretionary spending
- Restrict increased payroll expenditures to essential hires
- Re-evaluate all capital expenditures in light of short term cash requirements
- Re-evaluate fixed overheads with regard to reduced production and address as required
- Explore any governmental assistance available
- Review your existing payment terms with suppliers and renegotiate to as liberal terms as possible
- Discuss with lenders, credit facilities, and customers to know what to expect in the short term
- Maintain a list of possible actions to take if cash is needed and when, be conservative, and act early
Maintain a documented plan
Create a team to focus on these shorter reporting cycles. Ensure that they have visibility to all expenses and receivables. Your documented plan should encompass a shorter cycle plan that tracks each inflow and outflow of cash. This is essential to track what is happening and be able to accurately understand and provide forecasts of your cash position. Utilise models and tracking devices that are updated in real-time and tie each payment to a specific company-critical objective, whether short or mid-term.
This will allow for a week by week review of cash that is coming in and cash that is being spent to ensure that new policies are being followed and that the anticipated impact is being realized. These models can be used to “game plan” different scenarios and provide some element of planning capability when things start to return to normal. Focus as much on cash collection, where possible, as on outlays. Understand your full cash position, daily or weekly, if possible.
As the disruption begins to wane, companies need to constantly review their position and understand what is happening to the economy around them. It is critical to make sure that the recovery is real and durable before relaxing your cash management plan. Again, conservative action is better than moving too soon to remove restrictions on cash, only to have to attempt to reimpose them.
The short cycle cash flow models should assist in understanding what is happening with your customers and suppliers. Are cash inflows increasing? Is pressure to make outflows reducing? Is cash on hand growing? When these things are sustained and sustainable, then easing off the restrictions may be considered.
Remember, “Cash is King”, and it is the lifeblood of your company—everything else is just numbers on a spreadsheet. Assess how you can free cash, introduce stricter checks and balances to focus on what’s important, and model using all available data with the finance team. This enables you to stress test the financial position against all the best advice from epidemiological, Government and Banking sources of truth. Then you can make a considered and rational decision on how and when to return to normal.
This article was contributed by Joe Kenny is Vice President of Global Customer Transformation, ServiceMax