Effective Cash Flow Management Throughout the COVID-19 Crisis

Over the past decade, the sophistication of treasury tools has improved and changed the dynamic of how many treasuries operate.

However, some fundamental principles remain unchanged; cash is still king, and cash visibility & cash flow forecasting remain a top priority.

Nomentia recently welcomed a group of senior Treasurers to join a peer-to-peer discussion addressing the top cash forecasting challenges facing treasurers during the current COVID-19 crisis.

Here are some of the key findings and outcomes from the discussion:

Cash flow forecasting challenges during the COVID-19 crisis

• Cash visibility has become increasingly critical to Board level, strategic decision-making
• Treasurers are experiencing an increased demand for daily forecasts, particularly within cash restricted organizations
• Board demand around cash visibility and cashflow forecasting has grown exponentially, placing increased pressures on treasurers, their resources, and workflow bandwidth
• Forecast data from subsidiaries & business units are proving unreliable and difficult to manage
• Manual processes and an overreliance on spreadsheeting have created unprecedented stresses on treasuries' ability to produce frequent, reliable, accurate, and granular cash flow forecasts. Methods and processes are, in many cases: slow, cumbersome, subject to human error, and further complicated by an increase in remote working
• Reliability and accuracy of data have become key concerns, particularly within organizations who have failed to invest in Cloud technologies
• Variance analysis and scenario modeling have become a much-needed part of the cash flow forecasting process – this is proving difficult to manage for treasuries operating manual processes

Cash Forecasting Methodology

General consensus confirms cash forecasting remains, to a large degree, a manual process. Although a number of companies utilize treasury systems or ERP’s there is still a great dependency on traditional spreadsheeting for cash forecasting purposes.

Treasury is still viewed as an area of the business that processes cash forecasting data, rather than produces it and as data processing is mainly executed on spreadsheets, the process remains time-consuming and prone to error.

Data Reliability and Accuracy

Reliability and accuracy of data are the biggest concerns for treasurers.  The old adage of ‘’Garbage In, Garbage Out ‘’(GIGO) is especially relevant and the challenge remains that unreliable cash forecasting can adversely affect the bottom line. 

If you get your exposure wrong, there’s a knock-on effect with your hedging and potential FX losses, which in turn, will affect the P&L.

Top tips to improve data reliability & accuracy

• Culture: get buy-in to the cash forecasting process from senior management and business unit heads - even when economic times are good, and cash is more plentiful
• Educate: work with business units to develop a full understanding of the importance of reliable and accurate forecast data. Regular catch-ups and Actual V Forecast feedback will help develop a buy-in culture and identify which units need a bit more help with refining their forecast data
• Communicate: building good relationships with the heads of Accounts Payable and Accounts Receivable can help in providing more granular data which, in turn, improves forecast accuracy
• Automate: provide the tools and technology necessary for business units to produce the forecast quality required in an easy-to-use and simplified way. The simpler the process, the more likely you are to secure buy-in and commitment from subsidiaries
• Elevate: increase the importance of reliable and accurate forecast data from business units heads. To compound this need, consider incorporating cash forecasting as part of business unit key performance indicators (KPIs)

Cash-rich or cash-poor – preparation pays off

When a business is cash-rich the importance of cash forecasting, in some cases, takes a “back seat’’. Invoices are simply paid, and little interest exists around the detail of the cash flow effect. On the flip side, organizations operating with high debt levels need to forecast accurately and more frequently. 

Whatever your cash position looks like, scenario modeling provides a great advantage in both good times and not-so-good times – testing a variety of potential outcomes can allow your business to prepare, not only for the worst but also for future opportunities.

A recent example is the UK retail sector; preparations for Brexit included an increase in the UK facilitated excess stock to manage potential import delays and shortages. Whilst Brexit didn’t thankfully negatively affect supply chains, Brexit preparations proved beneficial when COVID-19 lockdown was implemented. As a result, surplus retail stock allowed some businesses generate more cash than expected during COVID-19, positively affecting cash flow.

In addition, knowing what cash will be available to the business in the short and medium-term can also assist decision-making around cash repatriation, debt or investment strategies.

COVID-19 – a catalyst for positive change

The current COVID-19 crisis has recalibrated management focus - some businesses are now managing their positions on a daily basis and require increased data granularity and variance analysis.  Accurate and reliable forecasting has become more critical than ever and the current crisis is largely presenting itself as a period of economic reflection and change. A period when treasury can highlight the need for increased investment in areas such as cloud technologies.

Conclusion

Sometimes it takes a crisis for organizations to realize the need to modernize. COVID-19 has provided this impetus for many businesses, now rethinking their need for investment in new technologies to manage cashflow forecasting, support remote working and refine internal processes.

Treasuries performing the best during the current crisis are those who are benefiting from pre-crisis technology investment – they have the ability and agility to rapidly recognize and respond to change.

Author: Anne-Marie Rice