The global fallout from Covid-19 revealed how vital it is to preserve liquidity during turbulent times. The acute stages of the pandemic are now behind us, but multiple risks loom on the horizon. Sooner or later, leadership teams will face the next downturn. Companies that hone a clear strategy for managing net working capital under duress will be best positioned to navigate through economic disruptions and emerge in a stronger position.
When crisis strikes, successful companies immediately take stock of market conditions and start laying the foundation for a solid 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.
Once leadership teams have those basic elements in place, they can focus on sustaining 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 is critical. That task may feel difficult amid all the unknowns, especially if the downturn is at an early stage and recovery seems more than a year away. Yet, sustained cash management practices will lay the groundwork for a company to emerge from a period of extended turmoil in a position to grow.
Monitor liquidity closely
During a recession, markets are unstable and conditions can deteriorate rapidly. Successful companies rely on cash war rooms 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 a crisis, leading companies 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 steps 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 take on the role of a project management office. Although the pressure for immediate action is past, war room teams 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
Many economic indicators now point to a period of disruption. Trade tensions and geopolitical risks are on the rise. At the same time, fundamental macroeconomic changes, shifting demographics, and rising inequities are likely to trigger serious economic and social imbalances over the coming decade.
As business leaders emerge from the Covid-19 ordeal, they are instilling their crisis cash management practices into daily operations, fortifying the business for a more turbulent world.
Two questions can help senior executives steer through an extended period of risk and uncertainty ahead:
- How can we ride out a future crisis, recover, and reemerge stronger than others in our industry?
- How can we learn from past crises to retool the business so that it is more resilient the next time around?