2020 CCAR Resubmission
With the new pandemic, the world has changed faster in the past few days than any could have foreseen.
As the coronavirus spreads, uncertainty on business activity and cash flows rises radically. Thus, managing and forecasting cash flows in the context of Covid-19 has become a matter of survival for an unprecedented number of companies.
CFOs first had to regroup and organize their teams to put them back in working order.
Now working from home, those teams have to function from different locations but yet stand together to face a major challenge: optimize cash flows to ensure sufficient level of liquidity on short and longer terms.
As a consequence of Covid-19, future financial in- and outflows have become uncertain, putting liquidity more than ever under scrutiny. Getting a clear view of cash flows and being able to make stress testing and simulations is now a must.
Trying to tackle all dimensions at stake with cash management in the context of Covid-19 may turn out to be quite an arduous, exhausting and ultimately not so effective undertaking. CFOs should focus on the main actions to be performed, and subsequent questions to be asked, to successfully support cash management in the context of Covid-19 and make an impact.
These 10 actions, which may be qualified as the 10 commandments, are:
How do you mobilize the right profiles and competencies and manage them? What is the PMO structure to optimize their impact and respond to challenges stemming from Covid-19?
Even in very large groups, the Treasury management team is limited in terms of number of people.
The challenge in the context of Covid-19 is to structure a core team that comprises the specific required profiles and then define a modus operandi to properly articulate the central treasury with the managers of the subsidiaries (cash pooling, etc.) while working from home and possibly with some tools and features working in degraded mode.
Defining priorities, clear focus, appropriate stakeholders and mandate is a must to fully leverage the potential of your Task Force and bring value to the current situation.
How fast can you get an outlook on your cash structure and evolution? Is this outlook reliable?
You should get an outlook covering working capital improvement measures (cash outflow), borrowing/financing local potential measures (cash inflow), temporary cost reductions (cash outflow), CAPEX reprioritization (cash outflow) and other cash inflows improvement measures (ex: flash sales, vouchers sales).
A cash dashboard with the key liquidity ratios (quick ratio, current ratio), cash balances by country, by currency and business should be set up accordingly and updated weekly.
Of course, this actually depends on the availability, granularity and quality of data. Given what is at stake with the Covd-19 pandemic, reliability of data is more than ever the foundation to build up effective analysis and make the right business decisions.
What revenues do you potentially miss? What expenditures can you drop or postpone? Can payments terms be modified for AP/AR? What are the impacts of a business and operating model redesign on you cash flows and liquidity needs?
Admittedly, it is neither Treasury nor CFO that will decide whether payment terms can and would be changed. This requires coordinated initiatives between both internal stakeholders (Management, Sales…) and external partners (Suppliers, customers…).
Yet, you are responsible to assess the impact of these decisions on cash in- and out-flows. As business models adapt to the changing economic landscape, increased communication and systematic adjustments to cash flow projections is a mission critical process with internal stakeholders
Are you aware of business initiatives taken by other departments that may impact the cash flow patterns and level of liquidity: inventory management, extraordinary discounts and commercial actions?
You should identify potential constraints on cash movements with countries or regions where a local business could be in danger without external funding.
Do you have a view on your counterparty risks (bad debts) per type of clients and sectors? Did you assess FX risk and define a hedging strategy?
You need to capitalize on existing processes to gather data from different sources and locations within your organization, but also to analyze them from a crisis perspective. This is all the more critical, as your company may have a limited or no risk-management experience.
Based on the outcome of the previous elements, what is the evolution of your cash flow and liquidity needs on a short to longer term basis?
Treasury may set up a 13-week rolling cash flow forecast with cash inflows and outflows. It would be reviewed and updated on a weekly basis and be as granular as required by the business. It is critical to increase the cadence of measuring your cash flows to minimize the forecasting changes from unforeseen business impacts.
What are the impacts of different scenarios on your cash flows forecast? Would you still be able to fulfill your legal and governance obligations?
Organize workshop across your organization to highlight the factors impacting liquidity and define scenarios. Ideally, you should have at least two different scenarios, based for example on the crisis duration or severity. Leverage your baseline to reassess forecast when these factors evolve.
You can rely on macroeconomic data, direct communication with stakeholders or market data to evaluate the impact of Covid-19 on you cash flows. Stress test models should be re-evaluated for factors associated with correlations with pandemic scenarios.
Do you have well-defined cash management dashboards specific to Top Management, business units and divisions, geographies, operations and sites? How often do you exchange with them on cash management matters?
You may generate and animate a cash action plan that covers the outlook of your cash situation and related components.
Dashboards and deliverables developed and customized to the context of Covid-19 should also be presented to internal stakeholders and their focus and roles explained as well, both from a financial and business perspective.
Treasury plays the lead role in providing specific and value added cash management outlooks to departments, divisions and locations.
What and how to communicate to suppliers, clients and authorities about the impact of your initiatives and action plan?
Structure your communication around simple indicators and messages such as current position, short term outlook, Management scenarios and cash stress test.
An outlook on your action plan that includes outflow management, inflow opportunities and actions impacting your cash may complete this.
Set-up a Suppliers’ committee with your Procurement team to assess on a weekly basis what payments can be postponed. Do not underestimate the importance of communication with your suppliers: provide a clear and fair picture of the situation and explain the actions.
Keeping a high level of trust is critical. Therefore, if you are forced to postpone suppliers’ invoices, engage them and share your action plans with them.
Are you aware of alternative or special financing options? Have you identified alternative sources of financing? Are you aware of local, governmental and supra-national extraordinary measures?
You have to define how the following actors may assist you with financing matters: your group and shareholders, your banking partners, financial markets, Government and international bodies.
The group and shareholders may provide cash injection, intercompany loans, payment facilities and Group guarantees.
Moratorium may be granted by your banking partners on the repayment of existing loans and credit lines may be redefined.
Financials markets may be used for financing initiatives using corporate bonds and debt instruments.
Local governments have launched specific packages to support companies in the context of the Covid-19 pandemic and shutdown situation. These often include anti-crisis financing packages, state guarantee schemes for bank loans, capital grant in the form of an advance and modification of repayment terms for state loans.
CFOs have to play their part in ensuring business continuity in uncertain times but also seize opportunities that may arise from this new context.
On the short term, to ensure effective cash management and forecasting but also to keep the business afloat, CFOs have to implement an unprecedented action plan to face a first of its kind event in some part of the world.
The situation may unveil organizational weaknesses and flaws, but also resilience and adaptability aptitude in adverse scenarios. Hence, by focusing on what is core, CFOs may, not only, successfully face the current Covid-19 situation but, as well, learn from it for the longer run.
If for most entities, strict cash management is a matter of survival in the current situation, for cash rich companies, there might be unique development or investment opportunities.
It can be both in terms of business (acquisition, redeployment of industrial capabilities, etc.) and brand (adapting payment facility for suppliers and clients whenever possible).