Cash is king and credit is crucial: Managing cash flow in a crisis
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Cash is king and credit is crucial: Managing cash flow in a crisis

Mar 20, 2020 · 2 min read

The ongoing Coronavirus crisis is having an unprecedented impact on the economy. As a recent FM magazine article pointed out, businesses need to immediately respond in three decisive ways:

  1. Scenario planning and stress tests to understand cash needs under different potential situations.

  2. Focus on key customers to understand commitments and explore options to minimize losses.

  3. Get a jump on cash flow to prepare for things to get worse before they get better.

Small-and medium-sized businesses are especially vulnerable in times like these. To prevent layoffs, companies of every size should reduce costs, restrict discretionary spending and defer capital spending wherever possible. Deloitte recommends that businesses talk to financing partners and banks to ensure credit remains available. And while key customers are important, it’s also essential to maintain relationships with key suppliers.

There are two invaluable resources for helping businesses address these issues: The CGMA Scenario Planning Tool and the CGMA Treasury and Cash Management Tool.

Use the CGMA Scenario Planning Tool to evaluate the potential impact of many “what if” questions that businesses may face as economic conditions evolve. This resource takes a comprehensive approach, using Shell’s contribution to scenario planning as an example. By gaining a better understanding of key drivers and key uncertainties, you can drive better decisions.

The CGMA Treasury and Cash Management Tool was developed in collaboration with the Association of Corporate Treasurers. It covers the full scope of the management accountant’s role in the treasury function, from accounting for treasury-related items under IFRS and U.S. GAAP to developing a financial strategy and capital structure that is in line with the overarching business strategy. This resource also delves into operational best practices that are especially important in difficult times.

Cash and liquidity management is the most fundamental element of treasury management. As outlined in the tool, the methods for managing liquidity are:

  • Cash management: Use cash generated by business operations, cash surpluses retained in the business and short-term liquid investments. The physical day-to-day management of cash ensures that payment obligations can be met.

  • Working capital management: Manage supplier payments, receivables and inventories to optimize the investment in working capital.

  • Organising and managing borrowing facilities: Use cash-flow forecasts, building in planned/required new funding and maturing funding that must be repaid or refinanced.

The key to these components of managing liquidity is cash flow modelling. Developing a rolling model that is based on the key drivers of cash flow will enable your company to proactively manage solvency. Under rapidly evolving economic conditions, the cash flow model must be shared with all business partners regularly. This ensures it can be monitored and revised as circumstances change, especially as credit risk increases.

As COVID-19 continues to disrupt local and global markets, it’s more important than ever that businesses take measures to secure their futures. While we live in uncertain times, these are dependable first steps.

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