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Cash Management in a Crisis

strategic cash management
Posted by John Champion June 15, 2018
Cash Forecasting

A crisis needn’t hit your company directly for you to be impacted. The recent outage on the Visa network across Europe was the start of what could have been a considerable problem for many treasury teams across the globe. In the end, this problem didn’t escalate into a full-blown crisis, but an outage on a key payment channel during a busy time of the week presents a substantial risk to the cash flow of a business. Had it lasted more than a few hours, drastic action would have been needed.

For a large, multinational company, there is always a crisis looming around the corner. Scale brings many advantages, but it adds exposure to many more risks. Having a high profile increases a company’s likelihood of being a target for a cyber-attack, having a global presence increases geo-political risk, heavy reliance on haulage and shipping can make a company vulnerable to wild fluctuations in oil prices, the list goes on.

Not every risk will become realised, of course, but inevitably there are some that will hit, and some that will miss. In this blog post we explore what a treasury department can do to ensure that it is ready, when the worst happens.

When disaster strikes

Carillion’s collapse in January caused huge problems, not just for its suppliers but also for companies seen as operating similar business models. Carillion’s customers faced an immediate cash crunch, leading to the failure of numerous businesses. Carillion’s contemporaries faced intense market scrutiny, leading to falling share prices and major questions over their long-term viability.

Incidents of this scale are rare, but disaster can strike in a variety of ways. It can hit you directly, like the NotPetya cyber-attack struck Maersk in June last year, costing $300 million. Or it might be a data breach, such as the incident at Equifax, which could be the most costly in corporate history (estimates currently sit at over $600 million). Alternatively, it might be internal practices that trip the company up, like the emissions scandal that rocked VW, costing a whopping $30 billion. In all of these instances, from a treasury perspective, it is the impact on cash flow and how you can respond that matters.

How does this affect Treasury?

Treasury is a department familiar with managing and mitigating financial risk. A crisis in the business will ultimately have a financial impact, and therefore the attention will quickly turn to the Treasury department.

When the crisis hits, and the focus quickly turns to cash, the executive leadership and other key stakeholders (banks, shareholders etc.) will ask:

  1. What damage has been done? (How has this affected cashflow/working capital?)
  2. What action needs to be taken now, if any? (Is fundraising required to shore up liquidity?)
  3. What further damage may be done if the issue continues? (What are the effects on cash flow of continued disruption to this revenue stream?)
  4. How can we alleviate that damage as much as possible? (What changes can be made to absorb the impact?)

If the cash and liquidity processes are running like a well-oiled machine, the treasurer will be able to give confident answers to these questions. As with any good crisis response, the key is preparation.

What do you need first? A cheat-sheet

First and foremost, managing cash in a crisis is about knowledge and fast access to information. While the Visa network issue a couple of weeks ago didn’t cause a full-blown crisis, it would have directly impacted the liquidity of many businesses and had it lasted longer would have no doubt caused a crisis for some.

In this situation, an understanding of the following would be necessary:

  1. How much revenue is collected through the Visa network daily?
  2. How much of this was in the affected areas?
  3. For the hours of the outage, what could be the maximum impact if no revenue was collected through Visa?
  4. Assuming there’s a lag in receiving cash from Visa, on what day will the drop-in revenue be felt?

Reaching out to the business quickly to gather on-the-ground analysis of the true impact will be central to the message delivered to executives while also allowing a plan of action to be crafted quickly.

For the top four or five potential threats to any business, be it a payment channel outage or a cyber-attack, a similar cheat sheet of KPIs will be needed to ensure treasury’s response is as valuable as possible.

How can you respond?

Ultimately, the response to the crisis, over and above quantifying the potential impact, will be the headline measure of treasury’s effectiveness. The response to a cash crisis will typically rest on access to internal and external liquidity.

You’ll want to know your current cash reserves (across all business units, in all locations and all currencies), and you’ll want to know them in real-time. That way you’ll know where you stand at the point of impact, and how much runway you have left.

From an external point of view, you’ll need to know how much undrawn liquidity is immediately available and how much support will financial backers provide if the situation deteriorates. Getting cash quickly into the business is the only action that will stave off a true crisis. Banks will want to know the potential impact on covenant and profitability levels so these will need to be close at hand.

How can you prepare?

Preparation is all about making sure that all of your cash and liquidity processes are running smoothly and your cash reporting and forecasting is comprehensive and accurate. A good cash forecasting process will include a clear view of accounts receivable, so you’ll be able to quickly factor that in to your incomings. A good forecast will also show what your accounts payable are, and where they can be delayed. Finally, you should be able to easily factor into the cash forecast which revenue streams have been shut off (or diminished) and what impact the impact on working capital will be.

When is the right time?

Unfortunately, however, if disaster strikes now and you aren’t fully prepared, if your cash flow reporting and forecasting processes are manual, slow, and inaccurate, it will be too late. Making sure the house is in order before a crisis hits will enable Treasury to respond confidently when called upon.

Setting up a new cash flow forecasting process can be achieved within a few weeks. The key to managing the roll-out project smoothly is to have buy-in from key personnel from the outset. Outlining the value that can be added in a crisis is a good way to contextualise the benefits the new process will bring.

Should you use software?

Many treasurers still run their cash forecasting processes manually on spreadsheets. However, in a crisis scenario, the CFO will want real-time reporting, across all business units, and a degree of forecasting accuracy that just cannot be achieved without the use of specialised software. To ensure a best-in-class cash forecasting process, it is therefore best to use dedicated cash flow forecasting software.