Financial Planning & Analysis

Notes from the Field: Cash Flow Crisis Management

Business is as much an art as a science. As consultants, we are often brought in to put out fires, whether it is helping a company through a major transaction or restructuring, filling in for a key executive departure or addressing a complex accounting or financial matter. Working in the middle of a crisis is the norm, and success is not about following a step-by-step formula. Every situation is unique. A recent client engagement involved our steering a company through COVID-19 in the middle of an already difficult restructuring, in which certain key cash flow crisis management strategies allowed the client’s business to survive. These strategies should be considered essential tools at the disposal of every CFO, CEO and business leader who wants to stand strong and be ready to battle any potential disruptions.

1. Develop a robust cash flow model.

This particular client is an industry that was deeply affected by the pandemic, which all but paralyzed the company’s business and dramatically reduced revenues and cash inflows.

As the company was already undergoing a major pre-pandemic restructuring, one of the key tasks was to develop a 13-week cash flow forecast that would be able to predict the company’s cash position at the end of each week, to the highest level of precision possible. (The goal was to have a variance of less than 1% from the forecast to actual.)

In order to achieve that precision, we worked closely with the IT team to extract daily revenue data from the company’s sales-tracking (POS) system. This data included sales and returns (based on estimates and, in some cases, specifically-identified transactions) by day, and it factored in a usual delay in collection. (Deposits from credit card sales generally lag the date of the sale by two to three days, depending on the processor.)

We also worked with the HR team to model payroll to the employee level and factor in all known variables, including specific labor forecasts provided by the field. (This proved particularly challenging. The company had 3,000 employees across multiple locations nationwide and several hourly/part-time employees with variable schedules).

Finally, we estimated vendor payments (i.e., Trade AP) based on historical data, known services/contracts engaged and other such data.

Interested in learning more about cash flow best practices? Check out these related blogs:

2. Swiftly identify and address benchmark shortfalls.

Once the cash flow model was complete, and taking into account all financing sources (e.g., available lines of credit), we used the model to make decisions based on the calculated liquidity runway under various scenarios and variables – both controllable and non-controllable. Layoffs were identified and implemented (i.e., furloughs and permanent terminations), discretionary expenditures were eliminated and, whenever possible, contracts and/or terms with vendors were negotiated (e.g., extending payment terms, replacing vendors with more cost-effective options).

3. Develop a Plan B. (Hire problem-solvers, and think outside the box.)

In parallel to the work of the Finance team, and under the direction of the CEO, the Operations team immediately began working on strategies to adapt our business model to function within the new-normal operating environment. We focused on:

  • Strengthening our revenue verticals that were less impacted by the changing environment (e.g., digital offerings),
  • Introducing new or modified services that could deliver our product in a contact-less environment (e.g., through videoconferencing) and
  • Minimizing fixed costs on our lines of business that were completely shut down.

Why is focused, timely cash flow crisis management so important? Learn more about cash flow management in our video Q&A:

4. Look outside the company for support.

Additionally, the company engaged external parties to explore potential long-term financing options including equity, debt and restructuring. This involved seeking the input and expertise of outside legal and financial restructuring experts, existing and potential investors, lenders, regulators and even explore ventures with competitors.

5. Be transparent and timely in communication.

At various points throughout the process, the company informed all stakeholders – notably, all employees – of the company’s financial standing, potential outcomes and upcoming changes, including the severity of the challenges before it.

While the above appear to be obvious, all odds were against success. Without any one of the above items, we would have failed.

Also, we should point out two additional key factors that were instrumental to success: 1) the client had a tremendously talented, loyal and motivated management team that simply would not give up, and 2) the client had a visionary CEO who, even within his short tenure at the company, quickly fostered a culture of innovation, inclusiveness and transparency.

Through astute leadership, effective use of technology and financial analysis tools, timely action and open and honest communication, the company survived and is now well positioned to emerge from the pandemic stronger than ever and ready for growth.

Learn More About Cash Flow Crisis Management & FP&A

If you need support or want to explore how we can optimize your company’s approach, please contact us or visit our cash flow consulting page. You can also subscribe to our CFO Insights blog for more informative content delivered right to your inbox!

If you’d like to learn more about 13-week cash flow forecasts, check out our free guide, which details what you should expect out of a quality forecast:

13-week cash flow forecast guide call to action

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