During this COVID-19 induced crisis, you must have heard over and over again that a core priority for many companies is preserving cash. It is true that preserving cash in the short term is extremely important but you also need to balance it with decisions that will enable the company to emerge from this crisis in as strong a position as possible. We can break cash management into four buckets:-
(i) Immediate working capital and ways to optimise receivables and payables as well as inventory, which is tougher in a rapidly changing demand environment.
(ii) The second element is the balance sheet. There are steps companies can take to unlock some of the value that gets hung up on balance sheets, like the capital structure and external funding.
(iii) Operational expenses are another lever, involving decisions to stabilise the business but also position it for fire power to push growth when the crisis eases off.
(iv) Controls around capital expenditures (capex) and discretionary or indirect spending that can be done very quickly.
Obviously all this needs to be done with great speed, whilst outlining a severe downside scenario with a clear understanding of the potential impact to your business.
In the midst of all this it’s very important that the CEO or the CFO communicate a clear and concise message, not just to the executive team but to the broader management, about what it means to develop a cash-based culture and the protocols supporting it. But it’s a two-way set of communications: not only from the top down around what the leadership is doing, but the feedback from the different parts of the business that affect liquidity, and that feedback has to funnel through to who is managing the cashflow and forecasting and is ultimately responsible for the cashflow.
It is extremely important that the person or persons responsible for managing the liquidity of a company, takes into account all things related to liquidity, whether it be the current liquidity position, some downside scenario modeling, or the basic tactics of how you collect and spend cash, to extend the cash runway as long as possible. The persons involved in managing the liquidity of a company in such stressful times need to communicate amongst them very frequently, preferably on a daily basis, to review the latest information from the business and the specific cash-preservation actions that would need to be adjusted for every situation. This daily meeting would look into the daily cash balances throughout the organisation. Have there been any changes? Any change in the risk factors? This could include any change of an available credit facility with your bank. You would then need to walk through the prioritisation of payments to be done on a daily basis and make sure that such payments are absolutely critical to be done on that day. This has always to be done within the context of the effect on the business.
As previously mentioned, all this needs to rest on a cash culture and how that gets communicated through the organisation. So questions like: Who is managing cash well? How do we reward those who are managing to reduce spending without sacrificing quality, safety, and customer fulfillment? How do we highlight those cases to the organisation? On the other side are questions such as, which people are not understanding the cash culture, and how can we help them change the behaviour? How do we help people adjust their operating model? These types of discussions should happen in the daily meetings held by those managing the company’s cashflow.
When a cash culture is embedded you should see employees starting to think like owners: What do I need to do today to make sure that I’m running this business effectively and optimising cash? The cash culture is also expressed in the importance of calculating the numbers: the cash position today, the cash on hand, plus real availability to your credit lines. Then you need to do the scenario modeling we talked about earlier. If you have a realistic but dramatic downside case, what does that do to your cash runway?
A question that is put to me frequently is – How do you strike the balance between maximising liquidity in the near term while keeping an eye on your position in the recovery? You need to keep an eye toward competing as effectively as you can coming out of the downturn—but in the short term, it’s a cash-optimisation game. The decisions business leaders need to be making today are difficult because they will negatively impact the business, but those decisions will also enable the company to survive a day, a week, for months. Many retailers, for example, are conserving cash to address the massive drop in sales and trying to extend their cash runway so they can survive to open their stores with merchandise. Please do take it it in chunks as it is tough to balance. Make the payments when you absolutely have to, defer them when you can. There are different horizons in cash management, from pure crisis to steady state to optimised working capital. It will be a developing journey over the next six to nine months at least, as we are living in an incredibly uncertain time where demand is changing daily. That’s why it is so important to have the discipline to make decisions as if every euro matters but also be nimble enough to keep updating your models.
One last comment is for public listed companies or companies who have listed bonds on the market. Many investors are concerned these days about companies’ cash positions. One of the key things is communication. In many cases, you may have to communicate earlier than you want to, so try to be systematic. Do you want to wait for the when things are clearer or for the next major occasion for any announcement or let investors know sooner that you have a good handle on the situation? Investors need to understand exactly how COVID-19 is affecting your business, so you should always start with what you are doing to ensure the safety of employees, customers, and suppliers. And you want to focus on the pandemic’s impact to date—how has it effected the supply chain? How has it effected demand? What are you doing about these?
