As the lockdown extends, a number of corporates are starting to dig into their treasury resources. After six weeks of confinement the decrease in sales will start to have a permanent impact on revenues rather than just delaying them. At the same time, a reduction in your activity might also have decreased your debts to suppliers and your stock position, giving you some breathing space. What cash-related actions can you initiate to best take on the post-confinement period? What can your treasury function do to support you during these turbulent times? And if you have no treasury function, is there still something you can do?
The good news is yes, whether or not you have a treasury function and independently of your turnover, your cash-management approach can still be adapted to support your activities through these difficult times. Three simple steps can be implemented no matter the size, activity, sector, and business model of your company. Let’s review together your action plan:
1. Build on a solid base: start by knowing your true cash position
One of the first initiatives to implement is daily liquidity reporting. Whereas accounting reporting is a legal requirement, treasury reporting is a management necessity. In order to be constantly aware of how the cash position of your company fluctuates you need to report daily on the liquidity position within your group or company.
How do you build a liquidity report?
Basically, you have to create a map of the cash available within the group or company compared to the cash committed and pledged in order to have a clear view of the cash position of the business.
Do you need a special tool to create this reporting?
Yes and no; if you don’t have a dedicated tool you can use good old excel and your web banking application. However, based on the number of legal entities in your group, the number of bank partners and bank accounts you use, the report-creation process can become operationally heavy and its accuracy questionable. Once again, based on your size and specific needs, there are plenty of available tools on the market to automate this task and reduce operational and quality risks.
2. Anticipate your cashflow movements by creating a tailor-made cash forecast model
After building and running the liquidity reporting process, the second step is to create what we call a 13-week cash forecast (your cash forecast model for the next 13 weeks).
On a weekly basis, cash forecasts for the next 13 weeks are distributed and reconciled with actual cash movements. These reports lead to a variation analysis which is then communicated to top management.
There are two different types of cash forecast models: indirect and direct. Whilst the indirect method uses accounting data such as the balance sheet and the profit and loss accounts, the direct method predicts exactly when cash will be coming in and out of the business. It tries to identify the exact day or week in a month when payments will be made rather than referring to invoice dates. As the forecast is based on predicted actuals it creates more accuracy, especially in the shorter term.
The indirect method use data from the balance sheet. It determines the cash created by operating activities and adds depreciation and earnings before interest and tax. It also predicts cashflows from investments and potential loans. Taking information from the profit and loss statement and balance sheet can help to predict long-term growth for the business.
What is the best methodology?
There’s no right or wrong way to put together your cashflow forecast. It depends on your priorities, needs and the data you have access to. Direct cashflow forecasting is a more accurate way of predicting when cash will be coming in and out of the business bank account. The indirect method is more commonly used because it takes data that is already available, thus being a simpler process for cashflow forecasting.
How do you build a direct or indirect cashflow forecast model?
The forecast model needs to be tailor-made to the business model of the company, which requires a good knowledge of its cash cycle. It is pulled together by the treasury team or accounting team using business input. Once again, if you have no dedicated tool, you can use excel. However, if you want to be able to run different scenarios and start cashflow modelling, many tools are available, for example, Business Intelligence (BI) tools or various tools that offer liquidity position measurement have developed cash forecast modules. Most of the dedicated tools integrate Artificial Intelligence in order to support your search for accuracy.
3. Optimize your cash management to leverage your free cashflow and decrease your funding need and cost
Once you have both your cash position and your cashflow forecast, you can start leveraging your knowledge in order to improve the cashflow management for your business by taking actions on:
- Facility use
- Long-term loan needs
- Debt repayment
- Liquidity investment
Having this visibility will allow you more time to improve your funding strategy and your liquidity investment strategy. Additionally, you may now have the capacity to implement ways to decrease your cash needs, for example:
- Secure your cash collections by implementing direct debit payment processes
- Consider the timing of payments to suppliers to potentially decrease costs and increase margins
- Offer buyers salary incentives depending on stock levels
- Assess the economic benefit of dynamic discounting and supplier funding programs
To summarize, several methods and tools are available and can be adapted to your business. However bringing together factual information about your cash position with the knowledge and experience of your business will put you in a stronger position to make accurate cash management decision that can save you time and money.
