The global financial crisis and resultant economic turbulence has dealt a double blow to companies. They are finding it more difficult to secure outside funding, just when cash flows are harder than ever to generate. Though not as battered by bankruptcies as corporate America, many companies in India Inc are experiencing severe cash flow problems. Airlines in India are prominent examples with Air India, Kingfisher and Jet Airways facing heavy operating losses due to the slowdown and, as a result, are seeking government assistance such as reduced taxes on fuel. Whether in India or elsewhere, the bottom line is that senior executives can no longer regard managing cash flow and liquidity as tactical and mundane. In today's brutally unforgiving environment, cash management has become strategic. Companies that manage cash and liquidity aggressively, and use the perspective and the data that come with it to gain forward visibility, have a big advantage in facing headwinds.

 

Wal-Mart, for instance, is aggressively managing resources to take advantage of others' weaknesses. The company cut capital expenditures, halted a stock buyback programme and trimmed inventories. It shifted cash from opening new stores to remodelling existing ones. That has allowed Wal-Mart to keep cutting prices and maintain a stable business amid the recession that has battered other retailers.

 

In India, Pantaloon Retail, the country's largest listed retailer, kept its ears to the ground early last year and prepared itself for a change in the business climate. It did so by cutting costs, redeploying existing staff to new stores and outsourcing its IT function, among other steps. It called its programme: "Say with pride we are stingy." When the slowdown did hit later that year, Pantaloon was ready. And its "stinginess" paid. The retailer's EBITDA surged over 43% in the tough October-December 2008 quarter to Rs 1.57 billion year-on-year as it cut staff costs and rationalised administrative and selling costs, while its competitors struggled. Pantaloon managed this while continuing to expand, albeit at a slower pace.

 

In turbulence, scenario plans built from cash flow and liquidity measures can show management teams how much cash they need to preserve and protect the business under different conditions. But the immediate opportunity is to use cash and capital resources more efficiently. The idea is to capture real-time information on what is flowing into and out of each business segment on a weekly and monthly basis, and then compare those flows with budgeted amounts. Big variances raise red flags in product lines, routes to the customers and vendor relations that can be addressed before it is too late.

 

The data helps companies spot patterns and understand how big changes in liquidity flow through to the profit-and-loss statement. By running similar analyses on the cash flows of competitors, customers, and vendors, companies can learn which rivals are vulnerable, which customers are strongest, and which vendors might not survive. With enough reliable data, companies can make better predictions and manage effectively through even a sustained period of turbulence.

 

The visibility gained this way can be powerful. One large high-tech industrial group in Europe discovered that payment cycles in several older industrial equipment businesses had been stretched out as sales slowed and customers struggled with payments. That tied up cash in mature parts of the business and prevented the company from investing in a major competitive opportunity in power from renewable sources. Managers tackled the problem by first examining the company's net working capital requirements by business line and function. They determined how long cash was locked up, from raw materials acquisition to the last customer payment. By comparing those cash cycles against the competition, they discovered rivals were collecting faster and aggressively managing inventories.

 

Closing that gap released more than $350 million in cash, providing money to fortify the mature businesses against the downturn and capital to invest in the promising solar business. The moves were not radical: cracking down on receivables collection, enhancing account payables terms with suppliers and managing inventories better. The key was focusing managers' attention on careful cash management.

 

Many companies have discovered in the downturn that their reliance on freeflowing, cheap capital during good times covered up a host of problems. At one major cosmetics company, high-, medium-, or low-volume accounts were all treated the same, and incentives encouraged orders, not sell through. When business slowed, the cash cycle lengthened, exposing the highly leveraged company to a liquidity squeeze. An analysis of all the inputs determined the company was spending $1.86 for each dollar of sales. Investing more intelligently by focusing on the cost of sell-through promised as much as $800 million in freed-up capital.

 

Analysing the cash flow and liquidity of competitors and customers also provides potent competitive information that can be used strategically. One global consumer products firm has used the downturn to win new customers with lower prices, convinced that its main rival's weak balance sheet and lax cash management practices would leave it unwilling or unable to respond. After doing a thorough analysis of its rival's liquidity, the company set prices low enough to attract new business. That crimped the profitability of its main business, but top management reasoned the company could afford some softness in that division because it was diversified into other product lines.

 

Not so its competitor. Lost business upset the relationships between fixed and variable costs and destroyed the profitability of the rival company's plants. With no focus on managing cash or liquidity, the company failed to respond with lower prices until it was caught in a severe liquidity crisis. With a clear view of the strength of its own balance sheet and the weakness of its rival's, the consumer products firm had enough confidence to make a bold strategic move when others were retrenching.

 

Managing for cash flow helps executives hone a company's strategy based on a full picture of how the business is performing. Armed with that vital information, managers can make informed choices and free up capital to invest opportunistically throughout the downturn.