In the current unpredictable economy, it is our responsibility as accounting and finance professionals to make our organisations as resilient as possible. That means we need a laser like focus on liquidity and risks to free cash flow targets.
Cash flow and liquidity planning can help a business stay afloat and even support growth opportunities in a turbulent economy.
Ensuring your organisation is in good shape when a downturn hits means utilising vital tools like cash flow forecasts and cash conversion cycles, as well as treasury management procedures, like capital structuring and asset-based financing. Importantly, it is also about managing relationships with key stakeholders, both internal and external.
Effective cash-flow management
Knowing income and outflow timing lets you plan ahead, so cash flow forecasts provide essential finance-management insights. If you find the forecasted cash balances are very different from the actual figures, consider revising your forecasting model. You should be modelling different scenarios that produce a range of outcomes to test your organisation’s resilience to specific events.
A monthly cash flow forecast lines up with the monthly cycle of cash drivers like debtor days, creditor days, and inventory days. This is fine when the economy is doing well. However, in an unstable economy, weekly cash forecasts can have an edge if you are in a position to produce them. The extra time and work weekly forecasts require create clear event-based parameters against which to manage cash-flow.
In both scenarios (monthly and weekly), set targets for those cash drivers and confirm that key influencers, like the sales director and the heads of business units, agree with the targets and are accountable for them.
Companies can also stay afloat during hard times by setting cash conversion cycle goals. These cycles measure the time it takes for businesses to turn their current assets into cash. That is helpful when the economy is slowing down because you can use them to find ways to become more efficient. Set goals for your cash conversion cycles and put a senior leader in charge of reaching them.
Steps for improving an organisation’s liquidity
If you find your organisation needs to improve its liquidity position, asset-based financing is usually an option worth considering. If your business model can work with capital assets that are leased or rented rather than purchased outright that might free up the cash liquidity you need.
If you find that new finance is required, think about if it should be raised as equity, debt or a combination of the two. Equity is the best shock-absorber, as it places fewer demands on the organisation’s cash flows.
It’s important to ensure that loan agreements don’t all mature at once but have staggered maturation dates. To achieve this, replacement agreements should be planned well in advance with lenders.
A key part of successful cash management is thinking about how the business interfaces with financial stakeholders. When a downturn hits you will quickly find out if your procedures for managing counterparty risk are robust enough. You will need to keep your own funding providers up to date on your plans and performance to boost their confidence in the management of your business and their understanding of your business.
Close alignment between business functions required
Taken together, a rigorous approach to cash management and a sensible liquidity strategy will help guide your organisation through these uncertain economic times. This requires close alignment, understanding and cooperation between the management accounting, tax and treasury functions when making decisions on investments, funding and risk strategies.
AICPA & CIMA’s Treasury and Cash Management Essentials explores these concepts in more depth. In addition, I would also recommend CGMA Managing Liquidity in Turbulent Times, a one-hour webcast, which looks at finding ways to save money through health plans, compensation arrangements, and retirement plans.