No matter the industry sector, senior management at the C-suite level is facing unprecedented disruptions in supply chains, employee management issues and customer dislocation as the world grapples with the coronavirus pandemic. Cash flow management in this COVID-19 environment has shifted the short-term focus away from sales growth and margin analysis toward crisis-level cash management and liquidity planning.
Senior executives will need to increase their direct involvement in liquidity management, visibility into the sources and uses of cash, and control over cash on hand. Cash management dashboarding and scenario modeling can provide the dedicated source of real-time dynamic information required in this current environment.
Dashboarding and projection management
In a crisis environment where cash is king, and where cash preservation is an important part of survival outcomes, the C-suite may need to create a team whose purpose is to monitor, project and plan the cash sources, uses and balances with increased frequency. A dashboard and forecasting team should include a single point of control to organize and oversee the process.
- Team structured information: Senior management and support functions will need to work together to coordinate information and data contributions from relevant departments. The head of the dashboard and projection team may be the chief financial officer, treasury director, head of finance or another senior person. Representatives from treasury or finance, operations, accounting, procurement, sales and collections may all play a role. Team composition and structure will vary depending on the facts and circumstances of each situation, the industry, the financial operations of the business and other factors.
- Automated dashboarding: Integrated, automatic information flow into useful financial dashboards that capture relevant financial information and important metrics can permit the team to focus on analysis and development of strategic and tactical options. The information must be accurate and reliable. Coordination with information technology or technical consultants is often useful to determine the most efficient way to compile data. Understanding the capabilities of company data systems or enterprise software applications will be important when designing dashboards, as well as senior and functional level management capabilities.
- Scenarios and planning: Development of financial projections that incorporate real-time or most current available dashboard data permits management to create scenario analyses for evaluating potential management decisions and plans. Scenario modeling provides an important tool to determine time horizons and frequency of reporting, and facilitates a data-driven dialogue with management and potentially with key stakeholders about possible scenario outcomes or decision options that may have significant liquidity effects. Upside and downside scenarios can be developed that incorporate the latest information and consider the key drivers of cash flow and possible outcomes.
- Maintaining and updating data: The crisis team can better utilize dashboards and financial projections by developing processes that update and maintain the data and the financial dashboards and projections. For example, supplemental schedules can present projected to actual variances, assumptions can be updated based on feasibility and organizational decisions, and model design and information sources can incorporate updated or refined data from departments. Upside and downside scenarios can be further updated and modified as a dynamic and adaptable planning environment is established.
Characteristics of cash management dashboards
The range of information represented on cash management dashboards can be quite broad. Therefore, the cash management team should select data that is relevant to the situation. For example, companies with lending obligations will want individual loan balances monitored, covenants tested and borrowing capacity calculated. Key operating statistics can be selected for each situation. The operating statistics will vary by industry and by company, e.g., the key metrics and cash flow drivers for a health care provider differ from a service company, which is different from a manufacturer or a wholesaler.
Daily and weekly projected to actual results can be monitored and refined to revise projection assumptions, or to completely reproject outcomes depending on the scenarios being assessed. Potential information may include balances, operating metrics, anticipated weekly collections, payroll and other disbursements. The scope is potentially very broad, so the team will need to select the more relevant information that it believes are significant drivers of cash flow and that it wants to review. Some examples of important information to monitor can include:
- Cash on hand
- Debt metrics (e.g., loan covenants, borrowing base, borrowing capacity)
- Immediate payment needs
- Outstanding receivable balances and collections
- 13-week cash flow summary (sources and uses of cash, actual to projected results by period)
- Financial metrics (e.g., days sales outstanding, days payable, inventory days)
- Critical vendors
- Relevant account balances
13-week time horizon
A common time horizon for cash management planning extends to 13 weeks, with weekly increments. The 13 weeks provide a common time horizon to develop a strategic outlook and tactical planning options. During this timeframe, weekly projections and actual results can provide a rolling view of the business and its trajectory.
A 13-week cash flow projection and related financial dashboards can be used to track actual cash movements and show exactly how much cash is on hand or anticipated to be on hand in future periods. In addition, the 13-week projection provides a view of a company’s ability to generate sufficient cash to fund continuing operations under a set of defined assumptions. It can provide advanced information about potential liquidity shortfalls, allowing management to plan proactive responses. Weekly projected to actual variance analysis also provides real-time feedback on management’s business decisions, allowing dynamic responses to the tactical implementation of crisis plans.
The 13-week cash flow model is not a simple balance sheet reconciliation. It can be said to represent a checkbook style of thinking about cash flows, with daily or weekly sources of cash, uses of cash and cash-on-hand reconciliations.
A cash projection model is only as good as the information input. Assumptions should be reasonable and feasible, based on company and market conditions. Changes to these assumptions should be tied to specific anticipated business decisions or options under analysis. Each assumption should be determined with consideration to its complexity and its potential effect on the company’s liquidity. Multiple scenario outcomes can be developed.
Each model may vary depending on the situation, but detailed, buildup assumptions can be developed. Some examples include:
- Key assumptions—items with substantial liquidity impact, where significant scenario outcomes from potential decisions can be tested by changing interactive assumptions.
- Variable cost assumptions—items that can be projected as a percentage of another metric or based on a variable assumption, such as units of production or units sold.
- Fixed-cost and low-impact assumptions—items that have relatively constant costs or that have little liquidity impact can be grouped for later analysis, or potentially be addressed with simplifying assumptions.
- Capital structure assumptions—loans, leases and other contracts can be tested for debt capacity, covenant compliance or possible modification of terms, e.g., forbearance terms and different interest rates (or the impact of penalty interest and fees).
The COVID-19 pandemic has placed a premium on management’s abilities to optimize its cash on hand. The ability to proactively respond to a rapidly changing business environment may be determined by the amount of cash on hand and the cash flow that may be reasonably anticipated in the months ahead. The severe economic shock to supply chains, service delivery, production capacity, workforce management and many other factors have placed unprecedented demands on senior management to be directly involved with cash planning.
Effective cash flow dashboarding and scenario modeling requires widespread involvement and buy-in, which in turn develops a more robust environment for dynamic and effective cash plan implementation. Top-down insight and control can be significantly strengthened through use of important bottom-up information that is based on analyses that understand the key cash flow drivers.
With a comprehensive cash management dashboard and projection mechanism in place, companies can leverage more accurate and dynamic financial information to endure the pandemic.