The COVID-19 pandemic has created the need for companies to understand their sources and uses of cash as an immediate priority. The C-suite is facing unprecedented disruptions that require crisis-level cash management and liquidity planning, and the situation needs to be addressed with a high-degree of urgency.
While many companies can withstand a short-term disruption in cash, a general slowdown in the velocity of cash transfers throughout the economy can create significant liquidity risk. Knowing where the liquidity soft spots may exist from a daily, weekly and monthly perspective can help C-suite teams better manage the business based on closely monitoring and anticipating actual cash coming in and being disbursed. Tactful, collaborative and data-informed conversations with stakeholders (both internal and external) can help preserve cash resources and move the business forward.
Pressures are mounting
The uncertainty, timing and severity of the COVID-19 pandemic and the resulting shutdown can affect a company’s future cash flows in many ways, including:
- Guidance and regulations that place new demands on business leadership
- Supply and demand shocks that have jolted the value chain
- Operations and workforce management stressed by a constricting environment that needs to preserve cash
- Priorities of increasing working capital (cash) and cost minimization followed by loss recovery support
In short, business continuity may be at risk from a range of factors in the current environment.
Phases of response
Priorities should focus on getting a clear line of sight to future direct cash flows, which allows an organization to undertake focused and tactical operational responses based on tested scenario modeling and cash management projections. With grounded insights to cash, the C-suite can guide and communicate critical operational decisions and create a real-time dynamic management environment, which can extend the cash runway for the organization and minimize risk in the recovery process.
- Form a crisis team: A crisis team should include both senior management and support functions. They will need to coordinate and work together to obtain and develop information from relevant departments across the organization. Key executives may include the CEO or president, chief financial officer, chief operating officer, treasurer, human resources, general counsel and other senior people. Outside advisors may be retained to provide financial advisory and consulting services or outside legal services.
- Assess options: Assessments and development of options can be evaluated using real-time financial dashboarding, iterative cash flow forecasts and projections, and the development of multiple scenarios. Functional leaders can bring their perspectives and data to bear on the analysis, e.g., from operations, procurement, production, service delivery, sales and human resources.
- Develop longer-term outlooks and assessments: The results of short-term tactical options can be evaluated for their longer-term impacts using actual-to-forecast and actual-to-projected experiences. Options can be viewed from weekly to monthly to quarterly to annual perspectives as the crisis unfolds and implications for recovery plans become more apparent. These analyses may have bearing on collateral management, exploration of tax and government support, or even the use of bankruptcy or restructuring alternatives.
- Implement and then reassess: Dynamic planning that uses dashboards and financial modeling to manage cash can help create and implement a proactive environment. Development of financial projections that incorporate dashboard data permits management to create scenario analyses for evaluating potential management decisions and plans. Scenario modelling provides an important tool for proactively managing options involving lenders, vendors, lessors, and workforce and customer relationships. In addition, regulatory and tax support strategies can be assessed and implemented in a coordinated fashion, based on common data and expectations.
Important liquidity concerns
Liquidity is driven by many factors. A number of key issues are paramount, such as:
- Cash projections and forecasts: Use of dashboarding for current information and use of multiple scenarios with short- and long-term time horizons can help management understand the ramifications of the current environment and the potential outcomes of management actions. The potential duration of this situation and business environment will depend on the spread of the coronavirus, government responses, the economy, the industry sector and the company’s own circumstances.
- Debt and obligations: Proactively informing and working with lenders, financial institutions, trade creditors and others may offer cooperation and development of alternatives, e.g., accounts payable prioritization, modifications to lines of credit, deferrals on interest payment obligations, temporary reprieve on covenant requirements, or other options.
- Workforce management: Staff planning, optimization, furloughs, notification requirements for salary versus wage employees, as well as evaluating the impact on payroll, benefits, retirement, etc. may provide ways to reduce workforce expenses.
- Sales demand and mix: Analyzing changes to the customer, product and channel mix may generate ideas for new strategies that can conserve cash and help reduce financial risk.
- Supply chain: Closely managing the supply of core goods, fluctuations in material and supply costs, and developing updated strategies based on current information may reduce the risks to supplies while also conserving cash.
- Receivables: Evaluating and modeling current day sales outstanding, understanding customer mix and COVID-19 impact, updating credit strategies, assessing promotions and the use of discount initiatives should be considered.
- Inventory management: Analyzing SKU-level adjustments, updating supplier strategies and inventory management offer other approaches to conserving cash.
- Economic and tax incentives: Closely monitoring government economic relief opportunities, as well as tax and other incentives, may offer a much-needed source of funds.
Projecting loss claims
Loss claims recovery may also become a priority, but the timing is uncertain. Although Small Business Administration loans and other government programs have been initiated, the precise timing of the approval process and the possible dates for receipts of funds remains unpredictable. The potential for businesses to receive insurance recoveries also remains uncertain.
These claims will likely require analysis of some or all of the following:
- Insurance policy and government program coverage—analyzing coverages (profits, earnings, business income) for a claim and relevant definitions of insured events, exclusions, loss measures, etc.
- Measuring losses—determining the appropriate basis for measuring losses, e.g., actual loss sustained or stated amount
- Ongoing or continuing losses—analyzing continuing versus noncontinuing expenses and saved expenses
- Expense analysis—determining the definitions and appropriate measures of gross profit by analyzing fixed, semivariable and variable expenses
- Additional operating expenses—analyzing the increase in the cost of operations that would not have occurred during normal operations and identifying additional expenses that may be covered
- Compiling historical financial and accounting data—reviewing historical financial performance, current business plans and forecasts to determine the projected sales of the business absent the pandemic
- Mitigation—identifying and quantifying mitigation of the losses
During the course of the COVID-19 pandemic, timing and communication are already proving critical. Triage may be necessary for businesses to prioritize their responses. The use of cash flow projections permits the development of responses among wide-ranging groups of issues. For example:
- The assessment of creditor issues may benefit from the data, information and insights drawn from runway (time) analysis, scenario analysis, dashboarding, and informed lender analysis and negotiations together with informed creditor analysis and negotiations and leaseholder negotiations, which benefit from an assessment of realistic recovery planning.
- Operations may benefit from implementation of stricter controls over cash, production management and accounting management. Anticipated cash shortfalls may permit better planning and implementation of workforce issues, such as Worker Adjustment and
- Retraining Notification Act compliance, employee benefits, and headcount and staffing resources. The need for changes to security matters, and issuance of customer notices and vendor notices may also be better anticipated.
- Asset strategies may require as assessment of cash availability and projected cash flows to evaluate furlough and wind-down planning, temporary closures, leases, asset sales, regulatory issues (e.g., Securities and Exchange Commission, Federal Communications Commission or state regulations), staff reductions and inventory options.
- A range of other matters may also require rapid assessments of cash balances and projected cash flows, such as collateral testing and compliance, asset sales, union issues and notices, taxes and other compliance reporting.
The development of effective cash flow management stems from the development of good financial data and assessments of potential financial outcomes. Dashboarding and scenario modeling provide tools for that information to be corralled and utilized. Timing and communication to manage among strategic and tactical options during the crisis require top-down insight and control. Effective cash management crisis teams that can develop the ability to monitor and project those items can bring the power of their financial information to bear while weathering the storm.