Cash Flow Management in Times of Uncertainty

The ongoing COVID-19 pandemic is disrupting supply chains, financial markets and workforce mobility. During any crisis, organizations must determine which processes are critical to continue operations and which processes can be suspended temporarily. It’s also imperative to understand what resources are required to support critical operations.

With the sudden decrease in sales for many businesses, the scramble to figure out how to manage operational cash flow is well under way. A deep understanding of your obligations and how you prioritize each one should be considered when making these decisions. Using a cash forecast to minimize surprises and enable these conversations could still be your competitive advantage. A cash model focused on short-term cash management can give clear guidance to the following:

• Change your cash cycle times:
1. Shorten time to collect by tightening up receivables
2. Lengthen time to pay by updating your payables strategy
3. Reduce inventory to shorten time between input costs and sales

• Identify key decision points such as:
1. Change your operating plan
2. Shift focus to an alternative revenue stream
3. Renegotiate with suppliers
4. Offer early payment discounts
5. Find new financing including factoring
6. Cut capital expenditures
7. Reduce fixed expenses

Short-Term Cash Management Strategies

A cash model is based on business scenarios and forecasting. The first step must be to update your forecast and build the ability to update quickly with new assumptions. The forecast model can then identify how to free up cash with specific actions for each core cash flow component: receivables, payables and inventory.

The goals of a short-term cash forecast are to verify your business can remain operational, whether a loan is needed, and determine the right amount of cash to keep on hand.

Once you set your goals and have insight into the biggest opportunities through your forecast model, then consider the following initiatives to drive capital improvement:

1. Tighten up receivables

• Identify at-risk customers and proactively collect
• Set up a plan for any customers who request extended terms
• Focus on boosting on-time collection
• Offer discounting options
• Educate your sales team about the importance of cash flow

2. Update your payables strategy

• Prioritize suppliers as critical and non-critical
• Negotiate terms extensions or payment plans with suppliers
• Audit payables and contracts to ensure you’re not over-paying or paying too soon
• Identify supply chain risk and expand sources of supply
• Shorten and automate the invoice-to-pay cycle to maximize cash forecast visibility
• Verify that direct draws meet contract terms and are not paid early, or convert to another payment method

3. Reduce inventory

• Refresh inventory plans based on sales forecast that accounts for changes in customer behavior
• Tighten minimum/maximum requirements and move to just in time
• Incorporate cost or margin into inventory decisions
• Liquidate excess and obsolete inventory
• Change or cancel orders for raw materials

By taking a closer look at your cash flow and updating your model with current assumptions, your business will be better positioned to make critical decisions. Consider making cash flow or working capital the top priority for your business right now and ask all business units to work within their functions to help deliver. Your entire business can adopt a cash culture.

For questions or assistance, contact our experts.