5 Steps to Addressing Your Business’s Cash Management and Liquidity

Cash is the lifeblood that supports day-to-day business operations. Near limitless access to capital and liquidity fueled a decade of growth, while illiquidity catapulted the economy into the financial crisis of 2007-2009. Regarding the broader economy, the ease of access to liquidity directly informs financial investment decisions as investors will demand higher returns for less liquid assets. Therefore, asset illiquidity deters trade and hence investment, impeding an efficient economy, leading toward widespread slowdown and contraction. Treasury 101 is now concluded. Here’s the good news — all indications suggest that the massive liquidity problems faced during 2007-2009 won’t be prevalent in the situation we face today. During that time, financial institutions faced tremendous capital tightening pressures, led in large part by a regulatory framework that included Basel III and Dodd-Frank, both establishing tight leverage ratios and liquidity requirements. Today, we’re witnessing massive amounts of capital taken out of financial markets and placed into safer havens. The shifting of capital coupled with the relaxing of liquidity requirements for financial institutions should provide an environment with plenty of available capital. The not so good news — in the near term, with the COVID-19 virus singlehandedly driving a rapid downshift in economic activity seldom — if ever — seen, many businesses will struggle to ensure the liquidity needed to maintain operations. With the overall demand for goods and services in decline for the foreseeable future, CFOs and business leaders will need to rapidly change their focus from growth mode to survival. Against this backdrop, companies must address cash management and liquidity now. We’ve outlined a simple plan that can begin to be executed immediately to gain better visibility and control over cash. We are confident that by this time next year, we’ll be riding a wave of economic growth; however, we must make sure we get there in one piece to enjoy that ride.

1. Analyze Your Current Position

This is only possible by accessing the appropriate data to provide real-time visibility. With that in place, we can begin to analyze and answer key questions, including:

· How much liquidity do we have available today?

· What do our key liquidity ratios look like and how much liquidity risk do we have today?

· What are the key sources that can become liquid quickly?

· What is our daily/weekly cash needs to fund operations?

· Where are there opportunities to decrease those cash needs to provide additional buffer?

2. Project the Future

Although predicting the future with any certainty is impossible, using pro forma modeling to stress test different scenarios can provide vital information to help better plan for the future, addressing the following questions:

· How will future events impact our liquidity position?

· How can we mitigate and be proactive to reduce the risk of potential cash crunches?

· What actions and policies can we take now, and what benefits will we see in future periods?

· What are our financing needs, and when should we be pursuing liquidity injections?

3. Create an Action Plan

Depending on our current state and likely scenarios ahead, a top-down strategy and tactical action plan should be developed and clearly communicated across the enterprise. Solutions could include the following:

· Policies and processes geared around reducing indirect spend

· Solutions geared around receivable collections

· Payable solutions to reduce transaction costs and provide better control of disbursements

· Automation solutions to reduce labor spend on routine and lower value transactional work

· Consolidation of vendors along with a renegotiation of terms and prices

4. Roll Out and Implement Your Plan

Before making sweeping changes that have the potential for disruption and non-compliance, define the plan around communications and change management to help gain alignment and rapid adoption. Basic communications and change management best practices include:

· Identifying the stakeholders (staff) that are impacted and to what degree they will be impacted by the change, and designing specific plans based on the projected impact

· Communicating regularly and often, and ensuring communication is specific and direct

· Building communication around the “why” — why must change happen, and why change will benefit the organization

· Clearly defining the roles and accountability around the roll-out plan – two or more people accountable for a single deliverable often means no one is accountable

5. Manage and Track

Cash management solutions tend to be scalable, able to deliver value even as the business environment changes and the enterprise reverts back to growth mode. Ensuring solutions are sustainable and scalable doesn’t happen by accident; addressing the following can help:

· Managing, tracking and reporting metrics and KPIs on a regular basis through visible dashboard-type reporting, accessible and communicated across the organization

· Establishing a culture adaptable to change and accountable to long-term cash management best practices

· Leveraging external expertise to help build the systems and processes to support and drive best practices

This plan, though simple, should be addressed deliberately and with conviction. It starts with building a thorough understanding of where the organization is today, while in parallel, projecting out liquidity needs and risks over the next 12 to 16 weeks. These two steps alone are half the battle. Equipped with the best possible information around current and future liquidity risks will directly inform the magnitude of change that will need to occur. These changes, if needed, are not rocket science. In fact, most are best practices that should have been addressed long ago but, for a variety of reasons, have not. So, now is the time to roll up your sleeves and get busy. We’ll be continuing to offer our clients advice and tools to help them navigate their current liquidity and financial health. Please continue to check our website for new content and feel free to reach out to one of our leaders who can help support your specific needs.

Content by John Cavalier

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