A crisis shines a light on the few things that matter most. Amid the coronavirus pandemic, leadership teams have worked quickly to support their employees and communities, while striving to keep their businesses afloat. The challenge ahead is weathering downturn and disruption. Companies in every industry are being tested as never before. Some will not survive. Most are likely to experience a sustained slump in revenues and profits.
To address urgent priorities in a fast-changing environment, many companies already have set up CEO war rooms—senior, dedicated, cross-functional teams that are empowered to make rapid decisions. Their first critical tasks were to communicate with staff and customers to put safety first, adjust operations to meet demand, comply with regulatory changes, and help mitigate the spread of Covid-19. Now, many are turning their attention to their company’s financial health—P&L, cash and liquidity positions—knowing that the economic crisis triggered by the pandemic could very well lead to a cash shortage that threatens some companies’ survival.
As many companies prudently shift their focus to cash, we see several common missteps. One is failing to adequately pressure test cash-flow projections under a variety of scenarios. A few questions can serve as a litmus test of whether you have a clear view of your liquidity and cash position.
- Are we testing the company’s ability to respond to a range of challenging scenarios?
- With the current burn rate and cash position, how long could we continue to operate?
- What additional sources of capital can we pursue, and what lead time do they require?
- How stable is our customer base, and what share of the business comes from our largest customers?
- How are receivables trending compared with the budget, considering both sales and payment terms?
- Have we identified our most important suppliers, and are we putting their needs first?
If the answer to any of these questions is “no” or “we don’t know,” executives should set up structures and processes to answer them as quickly as possible.
Act now. Immediate steps to address liquidity
Five steps can help CEOs and CFOs build a complete picture of the company’s liquidity and effectively monitor cash going forward.
Step 1: Create a central cash war room. This can be an add-on to your existing war room, or it can be a separate one dedicated to managing cash. Typically, the CFO leads the cash war room with a team drawn from treasury, sales, purchasing and human resources. A war-room approach enables rapid, real-time decision making and focuses leadership teams on the most urgent liquidity needs and cash-preservation actions.
Step 2: Develop a single view of your liquidity position and outlook. Create a 13-week cash-flow forecast. This diagnoses the severity of your current position. It also enables meticulous monitoring, planning and forecasting of cash inflows and outflows. Update the forecast weekly and compare it with real-time data.
Step 3: Launch decisive actions to preserve cash. Implement immediate mandates to reduce spending. Act quickly, understanding that speed is essential and initiatives can be temporary. Examples include a hiring freeze, a review of external spending (e.g., marketing), and processes for top executives to approve spending.
Step 4: Control all cash outflows. Initiate daily spending review sessions to challenge all purchase requests and instill a ruthless cash-preservation mindset across the organization. Focus on these questions.
What can we deny? Which outlays are not vital to operations and not yet committed?
What can we delay? Where do we have flexibility in timing or credit terms for required spending?
Should we invest? When is the business case for investment justified to enable continued operations?
Step 5: Prepare enterprise models based on different macro scenarios. Modeling helps the leadership team assess the company’s level of exposure, stress test the P&L and develop contingency plans. At a minimum, develop the best-case, base-case and worst-case scenarios. The worst-case scenario should envision a disastrous sequence of events. For most businesses, the best-case Covid-19 scenario will still involve a missed target. Conditions continue to evolve rapidly, and leadership teams should pressure test these scenarios regularly.
Once the leadership team has a complete picture of the liquidity, it can take several actions to preserve cash.
- Assess headcount and overhead expenses to identify cash-preservation opportunities.
- Review capital projects and other initiatives to determine which should be accelerated, continued, delayed or canceled.
- Explore various financing options and renegotiation of credit terms.
Two critical capabilities will help support these steps.
Adopt an Agile mindset
Your war room and its supporting teams will be most effective if they adopt Agile ways of working and can act quickly and decisively. Three elements are indispensable:
- Transparency. Track progress on initiatives centrally. Instill a real-time, single source of truth to measure progress.
- Scrutiny. Set up regular meetings to remove roadblocks and make decisions.
- Adaptability. Create SWAT teams to accelerate high-priority initiatives. At the same time, executive teams should track key initiatives and help remove obstacles when they get stuck.
Keep communication lines open
Crisis communication with your internal and external stakeholders is critical. Inform leadership and staff about the cash measures promptly and in detail rather than generalities.
- Communicate regularly with customers to reaffirm continued service.
- Inform suppliers of real-time changes, and stay in touch with vendors to avoid disruptions.
- Update lenders on cash-preservation actions and discuss concessions you may need in the future.
- Connect with other key stakeholders supporting the business through this exceptional period.
Plan now. Stay focused on medium- and long-term goals
Continue to pursue organizational transformation, boost accountability and meet targets at a rapid pace. Identify further opportunities to improve cash management, such as optimizing net working capital across accounts receivable, accounts payable and inventory to shorten the cash-conversion cycle. Start preparing a revised business plan for stabilization after the crisis, considering improvements implemented during the crisis, ongoing opportunities and results from strategic investments.
Finally, carve out time to think about what the future will look like, and take the opportunity to put new practices in place today that could deliver sustained cost and liquidity leadership tomorrow. While it is hard to take a longer-term view in the midst of crisis, leadership teams that have prepared for recovery and beyond will have a stronger starting point once the global health threat and the economic landscape stabilize.
Andrea Yandreski is a partner with Bain & Company’s Performance Improvement practice and is based in the Toronto office. Simon Henderson is a partner with Bain’s Performance Improvement practice and is based in the London office.