Treasury & Cash Management

A 2020 Recap: Cash Management & Why Cash is Still King

Last year brought disruptions in almost every industry. We witnessed significant interruptions in order fulfillment and delivery systems, chaotic drops and soaring demand in certain categories, fresh liquidity for borrowers and cash crunches for others. And cash management underwent rapid change for those suddenly with too much or too little.

Short-Term Cash Management Led to Underutilized Cash

Manufacturers, retailers and distributors were already dealing with a host of distribution, inventory and labor related constraints. Then consumers radically changed their buying preferences in a matter of weeks. Many companies faced a combination of surpluses and shortages, and cash management was brought to the forefront. 

The winners (outside of the toilet paper anomalies) were companies that were able to quickly react and reposition their operations.

Those that survived market challenges had varying reactions to the new economy. Some:

  • Quickly borrowed at low rates to build cash reserves,
  • Expedited smaller capital improvements to capture demand spikes or
  • Retreated to a cash preservation mode to ride out the shocks.

Across industries, many companies conservatively adjusted their capital investment strategies with as much as a 20-30% reduction in capital spending in 2020. Short-term planning led strategic discussions. 

For many companies, this resulted in cash sitting underutilized on the sidelines.

Overall lessons were learned, and new dynamics are beginning to settle. Now is the time for executive teams to focus on improving their data analytics, generating additional cash flow from new external resources, and employing their excess cash in productive ways.

Hindsight Should Stay in 2020

Cash management in 2021 will need to be more than a static forecast of averages on historic and near-term sales and expenses expectations. Even the most robust of models will need to become more flexible to be able to pivot with market shocks.

Updated detailed cash flow forecasting should include scenarios with new external risk variables. The cash forecast needs to be more than just a tool to estimate debt needs/payments or a way to track variance to actuals for reporting.

Scenario planning, if not already incorporated into weekly cash forecasts and inventory demand plans, should be developed now as system shocks are likely not over.

A few expected changes could cause significant variances to the best of plans this year:

  • Management teams need to be prepared for increases in borrowing costs.
  • The next administration indicated increasing corporate tax rates should be expected.
  • Supply pricing is likely to continue increasing, impacting margins.

And other supply chain challenges will continue into the new year:

  • Competition for warehouse space will still exceed capacity, especially near transportation hubs.
  • Transportation costs have skyrocketed, driven by a shortage of rail and truck as more vendors continue to increase their e-commerce presence.
  • Port delays from a labor shortage are causing shortages, and increasing freight costs may continue.

Beyond accounting for increased sensitivity with expense variables, cash flow forecasts need to incorporate outputs of data analytics to inform decisions and planning. Knowing one’s expected cash position as well the level of cash need, or excess cash, is essential.

Want to know more? Learn what should be in your cash flow forecast:

13-week cash flow forecast guide call to action

Excess Cash Should Be Employed

Many companies recently raised funds, drew down on lines of credit, or borrowed from new federal loan programs to ride out the pandemic.

And now that 2020 has come to an end, vaccines are being introduced and companies see a light at the end of the tunnel, boards and executives need to consider how to best employ their cash reserves. 

Holding excess cash is not without risk. While the loans banks made recently via the PPP lending program were protected from defaults, cash borrowed by companies was not protected. The unlimited safeguards on cash on hand have not replicated those in place after the 2008 financial crisis.

Many companies recently borrowed in multiples of the new FDIC guarantee limits set at $250K. One strategy for protecting these borrowings is to simply allocate the cash across multiple financial institutions. While this is achievable, it is cumbersome from a reporting perspective and not lucrative.

Interest rates are generally expected to increase with inflation in 2021, albeit this is not guaranteed. Treasury rates went negative in 2020, as safe short-term investments were needed most for new borrowers or those with excess cash on hand. And they are only just above zero now. These shorter-term investment options appear less attractive presently, compared to some longer-term strategic uses of excess cash.

Accordingly, investment alternatives are again at the forefront of cash management discussions, given the abundance of unsecured or underutilized cash.

Strategic options for excess cash include:

  • Debt repayment of borrowings at higher interest rates, noting any prepayment penalties
  • Capital expenditure plans across technology and infrastructure can be executed or expedited
  • Acquisitions and other partnerships
  • Dividend payments to shareholders
  • Share Repurchases, with an intent to increase corporate leverage

Underutilized cash is expensive from a lack-of-return perspective. Cash sitting only as a safety net hurts operating margins. Excess cash at higher interest rates begs to be repaid or restructured.

However, if your net borrowing costs are relatively inexpensive, consideration should be given to utilizing it to strategically propel the business forward.

Interested in learning more about optimizing cash flow?

Read our blog post: “Optimizing Cash Flow in Challenging Economic Times

Alternatives When Cash Remains Tight

For those companies that are tight on cash or still need more cushion, options remain to generate cash in the near term. 

Additional government lending programs are still being considered, and borrowing rates at the present are still historically low for now. 

Near-term considerations should be given to securing the balance sheet. Fixed-rate debt at this point is preferred. Yet treasuries, even for a short period, would provide insurance against shocks.

Borrowing excess cash for certain strategic options to position your company for new growth is also an alternative. However, the current lower effective cost of capital should not necessarily be applied immediately to all long-term capital investment decisions.

Outside of debt plays, credit terms should be renegotiated where possible. This is especially relevant with vendors with which purchase levels are increasing significantly. However, in the current environment, one should expect limited results – unless your product is a 2020 success story.

You should work with your banking institution to perform a review of your cash holdings and discuss new product offerings that might prove beneficial to you and your supply chain vendors.

For instance, many larger banks offer supply chain finance programs that can accrete up to 2% of pre-negotiated discounts. These tend to be attractive to international vendors from an early-pay perspective. Commercial card agreements offer generous rebate structures in lieu of pre-negotiated discounts and terms.

Outside of these borrowing and financing alternatives, current assets and payables should be continuously monitored. While many sources of cash from receivable and payables reviews are limited or one-time, they are sources of cash nonetheless. 

Inventory and distribution reviews, especially in the new environment, are critical at this juncture for longer-term cash generation via expense reduction as well as margin and velocity improvement.

Prioritize Cash Management

Make time now to reassess your cash position, forecasting methodologies and tools, and investment processes. And given the chaos and time constraints many are facing right now, reaching out to external consultants for assistance is a worthwhile idea to consider. If you would like to learn more or explore how we can support your team, we invite you to contact us. You might also be interested in our downloadable resource below:

13-week cash flow forecast guide call to action

About the Author

Danelle is an accomplished treasury management and financial executive with over 20 years of diverse strategic, financial and operational experience across industries including consumer products, pharmaceuticals and healthcare, manufacturing, hospitality and entertainment. Her focus has been to combine the day-to-day management of finance, accounting and treasury departments with various transactions / strategic initiatives including capital raises, debt refinancing, due diligence and asset sales. She has led the redesign of management and accounting systems, overseen financial restatements and developed new financial reporting and financial modeling. Danelle has taken direct CFO roles at two early stage CPG companies and with 8020 Consulting, Treasurer for Bolthouse Farms. Other consulting roles have included companies of varying size and industry, from being Controller of a $100 million specialty biopharmaceutical development company to Director of Reporting & Consolidations for an $8 billion hospitality company. An alumnus of PwC and FTI Consulting, Danelle holds an M.B.A. from the Fuqua School of Business, Duke University and a BA in Economics from the University of California, Los Angeles.

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