With the current COVID-19 crisis, the nuts and bolts of cash flow management have been to consider liquidity needs and action plans in the context of overall essential business requirements, given the recent decline in revenue. While some large San Francisco Bay Area tech companies may be better insulated than other companies, all SMBs (small- and medium-sized businesses) are scrutinizing their expenses and cash flow.
"All options to generate positive cash flow are on the table," said Protiviti managing director Jim DeLoach.
He went on to advise chief financial officers (CFOs) to "Defer capital expenditures, manage working capital components, obtain additional sources of financing, secure credit relief, eliminate non-essential travel, cut overhead and discretionary spend, and pursue a multitude of options in the HR playbook."
DeLoach also advises CFOs to leave their comfort zone to explore new ideas. "You want to engage in out-of-the-box thinking on ways to create revenue such as online sales and home delivery in this challenging environment," he says.
Monitoring and collecting cash from receivables (AR) has never been more important. Hackett Group associate principal Craig Bailey recommends CFOs look for quick cash wins within existing processes, since companies may need to inject liquidity into their supply chains either by reducing terms for small or critical suppliers or extending terms for shaky customers.
"Quick wins on accounts receivables can include making sure that there are no recurring barriers to payment through internal process performance such as delayed billing, invoice errors, lengthy invoice dispute resolution processes or internal escalation protocols," Bailey points out.
On the accounts payable side, quick wins can include making sure that existing payment terms are being respected and that your company is not paying suppliers early. Also make sure ad-hoc payments do not exist outside of the normal payment cycle.
Expert CFOs should implement the following strategic tasks to maximize cash flow for their companies:
Create a cross-functional cash task force to monitor key cash metrics weekly if not daily.
Define weekly cash collection targets. Re-plan all customer touchpoints by value, not volume, to get invoices paid.
Make sure credit risk processes are robust and up to date with the latest information. Monitor established customers for payment behavior changes. This will help to avoid high levels of overdue accounts receivable from accumulating.
Promote and provide education around key metrics and the dollar value of each day of working capital metrics — Days Sales Outstanding (DSO), Days Payable Outstanding (DPO), Days Inventory Outstanding (DIO) — across all operational decision-makers to raise cash awareness in daily activities.
Communicate with the supply base to understand which suppliers may be at risk, and which suppliers can potentially temporarily extend terms to get you through the crisis.
Task supply chain and operations teams with reviewing inventory levels and planning parameters to ensure that cash is not being locked into excess stock. Now is the time to revisit service level requirements and right-size inventories. Companies may decide to build stocks on core stock-keeping units (SKUs) where orders can be substituted rather than across their entire product portfolios so as to optimize cash flow in the coming weeks.
While taking all necessary actions now to boost the chances of short-term survival is critical, CFOs also must focus just as much on the aftermath as on the current crisis.
DeLoach goes on to say, "We’re not returning to 'business as usual' any time soon," he says. "The big challenge is how the organization pivots to a ‘new normal,’ whatever it will be. Therefore, decisions should be made not only to get through the crisis as a survivor but also emerge from the crisis prepared to pivot in a world that might look different from the one, we once knew."
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