Covid-19 and Beyond: Cash Management Practices to Weather the Downturn

Covid-19 and Beyond: Cash Management Practices to Weather the Downturn

Take an honest look at the business, and decide where to improve.

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Covid-19 and Beyond: Cash Management Practices to Weather the Downturn

The Covid-19 pandemic is likely to provoke a more prolonged economic downturn than many companies initially expected. Many leadership teams have taken rapid steps to preserve liquidity. Now they are turning their focus toward managing through a lengthy recession, planning for recovery and retooling to emerge from the crisis in a stronger position.

As companies take stock of market conditions and plan for the future, it’s important to ensure a solid foundation for recovery. The vital first steps are setting up a cash war room, developing a 13-week cash flow forecast, modeling profit-and-loss (P&L) scenarios and initiating greater oversight on spending.

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The next step is to develop a plan to sustain a stable liquidity position over the next 12 to 18 months and beyond. An effective plan focuses on two key goals: rigorous liquidity monitoring and actions that can significantly improve or even transform the company’s cash position.

Maintaining an unflinching eye on cash will be critical in the months ahead. It may feel difficult. The downturn has just begun, there are many unknowns, and recovery may be more than a year away. Yet, sustained cash management practices will lay the groundwork to emerge from the crisis in a position to grow.

Monitor liquidity closely

During a recession, markets are unstable and conditions can deteriorate rapidly. Cash war rooms need to monitor liquidity relentlessly through each phase of the recovery. Four processes that help with immediate cash conservation are also important for managing long-term liquidity.

  • Cash flow forecasting: Ensure that weekly cash inflows and outflows match the short- and long-term forecasts. Improve forecast accuracy where there is high variance. Refresh cash flow forecasts as new information arises, and monitor key metrics such as available cash and cash burn rate. Continue to track cash collections, and pursue customers with outstanding account balances.
  • P&L scenario modeling, with trigger points: Refine P&L scenario models to reflect the latest recovery trajectories and industry perspectives. Build tailored action plans based on a set of trigger points to enable a fast response (“when X happens, we do Y”). Watch for these indicators, and have teams ready to act.
  • Spending surveillance: Use daily spending review sessions to assess whether purchase requests are critical to the business. Consider expanding the authority of these review sessions to oversee other decisions, such as recurring spending, capital expenditures and hiring.
  • Central initiative tracking: Centralize tracking of all cash outlays related to business operations to ensure that the organization achieves its targets and maintains a single version of the truth. Assign owners to each initiative to ensure accountability.

Take transformative actions to improve liquidity

To sustain the business throughout the crisis, leadership teams running the cash war rooms should look for opportunities to take big, bold steps to fix business fundamentals and strengthen the balance sheet for the future. We call those transformative actions.

Consider actions that could help the company achieve its strategic goals following the recovery as well as more urgent moves that will help it navigate through the recession. Take an honest look at the business to identify areas that need improvement, and envision the desired future state. That exercise helps to identify what should be done today to protect areas of the business that will support the long-term strategy. We typically see four areas of opportunity:

  • Optimize net working capital. Stabilize cash for the long-term by improving net working capital practices. Optimize cash conversion by reducing outstanding receivables, minimizing inventory on hand and lengthening payment terms. Quick wins include eliminating early payments, pursuing overdue receivables and selling obsolete or slow-moving inventory.
  • Review projects and capital expenditures. Reevaluate the capital expenditure pipeline, starting from a blank slate. Identify the projects or major outlays that could be delayed or canceled as well as those that should be accelerated. Consider the strategic merits of each project or expenditure as well as available funding and team capacity. Prioritize projects that support continued operations or that address near-term safety risks.
  • Improve cost structure. Reduce costs during a prolonged downturn to help preserve cash. Companies can tackle cost improvement and liquidity protection efforts in parallel. Some companies may reduce costs across the board, while others may focus on specific operations—for example, supply chain optimization.
  • Consider bold restructuring opportunities. Make bold moves to restructure and support cash preservation over the long term. Assess various business units, geographies, channels and products to identify areas that are underperforming. Determine where to deploy improvement plans and where to implement a broader restructuring plan to reduce drag on the organization.

Adopt an Agile mindset

Once the acute phase of the crisis is over, cash war rooms will take on the role of a project management office. Although the pressure for immediate action is past, war room teams will play a vital role in sustaining liquidity during the months ahead. The most effective war rooms adopt Agile ways of working to manage cash through recession and recovery. As cross-functional, nonhierarchical Agile teams, they make decisions and launch initiatives rapidly to free up cash, adapting their approach as they learn. They are accountable and have the backing of senior management to resolve roadblocks. The Agile focus on transparency, scrutiny and adaptability helps teams keep abreast of the company’s liquidity position and initiatives designed to preserve cash. Successful companies have Agile teams share their war room experience with the broader organization to help build a more adaptable, nimble workforce for the future.

Plan now: Retool the business for the future

The road ahead is long and may involve further shocks and disruptions; the actions that leadership teams take during the weeks ahead will determine their companies’ resilience on that journey. Two questions can help senior executives steer through the uncertainty:

  • How can we ride out the crisis, recover and emerge stronger than others in our industry?
  • How can we learn from this crisis to retool the business for the new world?

Develop working hypotheses about the dynamics within your industry and the post-crisis landscape, and shape a strategy to outperform. This will guide today’s decisions and help the company plan for recovery despite ongoing uncertainty about how quickly the economy will bounce back.

Of course, recovery plans will evolve over time. Importantly, when the time comes to restart operations fully, they will help leadership teams understand how much liquidity the company needs. As they emerge from the long transition, leaders will instill their crisis cash management practices into daily operations, fortifying the business for a more turbulent world.

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The global Covid-19 pandemic has extracted a terrible human toll and spurred sweeping changes in the world economy. Across industries, executives have begun reassessing their strategies and repositioning their companies to thrive now and in the world beyond coronavirus.

Andrea Yandreski is a partner with Bain & Company’s Performance Improvement practice, and she is based in the Toronto office. Simon Henderson is also a partner with Bain’s Performance Improvement practice, and he is based in the London office.


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