ESTABLISH A CASH MANAGEMENT OFFICE
Companies need to establish a dedicated office, akin to a war room, that is explicitly responsible for managing short-term liquidity. The office serves as a single source of consistent and accurate information about the company’s cash situation. It should have a direct line to the CFO and access to the full senior leadership team. The cash management office can establish warnings and alerts for specific contingencies, and identify and prioritize potential mitigation measures. Above all, the office rigorously governs all cash releases throughout the entire finance function. Interestingly, we have found that many companies don’t have a clear idea of where cash flows out of (or into) the organization and, consequently, which drains need to be blocked. Cash management can be a natural function for companies that have been under tight liquidity circumstances in the past. But even high-performing companies often need to adjust to new challenges.
CREATE ROLLING LIQUIDITY PLANS
The cash management office should begin to generate rolling cash and liquidity scenarios for the coming week, month, and quarter. These plans should be created from the bottom up, drawing on data from individual business units and geographic markets and aggregated into a single comprehensive plan. Ideally, they should pull from enterprise data on an automatic basis and be sufficiently accessible to permit collaboration by multiple stakeholders. In addition, since this will not be a one-time exercise, generating liquidity plans requires standardized tools. For example, week-by-week deviation analyses are needed in order to maintain the right level of accuracy over time. Most important, liquidity plans form an important basis for the next step: the launch of cash preservation measures.
LAUNCH CASH PRESERVATION MEASURES
With the cash management office established, leaders can begin to develop and apply measures to free up internal funds, prioritized by their relative impact and speed of implementation. Because of timing constraints, some traditional cash management measures are now less relevant. These include top-line measures such as tactical pricing initiatives and promotions, changes in the procurement portfolio, and financing measures such as optimizing taxes or restructuring debt.
Instead, the measures should be limited to those that can generate results in weeks—or even days. These include the following:
- Personnel Costs: leveraging all government support programs, stopping all new hires, reducing overtime, adjusting capacity, and freezing (or reducing) wages
- Inventory: launching fire sales, halting all new orders, accelerating the return of inventory back to manufacturers and distributors
- Receivables: collecting past-due debt more proactively, adjusting terms and conditions, factoring accounts
- Payables: extending terms for payables, halting any in-process payments
- Investments: stopping or scaling back any planned investments, selling noncore assets (potentially through sale and lease-back programs)
A specific owner should be assigned to each measure, with full authority to take the required actions and full accountability for results. Because these measures touch many core business functions, the overall cash management team should include members with all the relevant expertise.