Act now to recover: getting your working capital management fit for the future

With such great uncertainty prevailing about the future and pressure created by low business activity, companies in many industries are at risk of running into cash issues. This means it’s important to gain transparency on your liquidity forecast to spot problems early on, implement a cash culture throughout the business to preserve cash, and identify potential levers to improve the situation in the medium to long term. Managing your cash properly will enable you not only to preserve value, but to actually create it longer term. 

The biggest potential killer for many companies striving to weather the storm in recent months has been cash. Despite the level of support for businesses provided by the government in Switzerland in response to Covid-19, cash remains a potential issue that companies shouldn’t ignore or underestimate. While trying to juggle all the different priorities competing for your attention in a crisis, it’s easy to take your eye off cash and assume that liquidity will eventually take care of itself. Often the tendency is to focus on top-line growth, cutting costs and thinking about strategic options like selling parts of the business. Naturally these are all valid considerations, but they shouldn’t distract attention from cash. This is borne out by experience in the wake of the 2008 financial crisis and other health crises we’ve seen around the world in recent years: many companies saw the benefit of paying close attention to managing their liquidity to avoid the worst case, but failed to act in time. It’s a lesson worth heeding this time round.

Preserve value by gaining control of what you can control 

The main problem in a situation like the current one is that it’s hard to predict the time lag between your cash position and the impact on the P&L statement. With so many variables − we don’t know how and when consumers are going to start spending again, and we don’t know if there will be unforeseen setbacks on the pandemic front – it’s difficult to tell how much cash will be coming in. And especially in sectors such as hospitality, leisure and travel that are starting with an income base of virtually zero, this can be a very disconcerting state of affairs.

As in any situation with so many variables, the most important thing is to work out what you can control and set about controlling it. Specifically, this means doing everything you can to get your working capital in shape so you’re ready to respond once revenues recover. A good start is to take control in four key areas:

• Stronger focus on incoming payments (cash in)
  Now’s the time to do a targeted analysis to prioritise and focus on operational tasks and teams. The aim is to rapidly deploy capacity to mitigate the negative effects on areas such as shared service centre activities.
• Control over timing of outgoing payments (cash out)
  It’s important to evaluate supply chain risks and critical factors. Consider implementing measures to secure liquidity and support communications and relationships with your suppliers.
• Cash transparency of supply chain and inventory management
  This is about ensuring the transparency of global inventory movements and controls of lead times, taking account of demand volatility. Think about evaluating supply scenarios and potential alternatives.
• Working capital improvement levers
  It’s a good idea to identify key working capital levers that affect your cash flow. A very helpful tool is to set up a short-term rolling liquidity forecast to continuously monitor cash.

Ideally, especially at these critical times, you should be endeavouring to establish this level of cash-consciousness throughout your organisation. If everyone assesses every decision through a liquidity lens, your business will be better protected on the bumpy road ahead.

Create value by improving your working capital performance longer term

An added incentive besides survival is that every step you take towards managing your liquidity more effectively can potentially not just preserve value in the current emergency, but can also create value in the longer term. There are four main levers of successful working capital performance: standardised commercial terms, processes that facilitate a quick cash return, thorough monitoring, and an embedded cash culture. Here’s a brief summary of the technologies and best practices that are available to help you exploit these four levers:

1. Commerical terms
   Having used data analytics to understand all the terms in place, you can establish ‘preferred terms’ on the basis of internal and external best practices. This will allow you to develop a model to use in negotiations and term adoption.
2. Process optimisation
   It’s important to develop an understanding of each process and walk through testing and process optimisation with the help of data analytics. It’s helpful to challenge the individual steps of each process with the aim of optimising full processes in working capital management terms.
3. Compliance and monitoring
   Here too you can use data analytics to measure compliance with terms and understand the key reasons for non-compliance. This will enable you to evaluate the changes needed to assure compliance, evaluate the potential cash impact, and establish a relevant working capital management dashboard.
4. Cash culture and management
   As we saw before, it’s crucial to establish a broad-based cash culture, ideally making cash and working capital part of performance measurement and laying down accountability and responsibility for working capital management performance. Top managers should be involved from a monitoring perspective.