By Sam Goulson, Senior Manager and Michael Moffett, Cash Leader, Operational Restructuring, PwC
Do you understand the risks that you can afford to take and the stress points where more urgent action may be required? By prioritising this will you be more able to absorb shocks and volatility and prepare for growth?
These are very real and pressing issues right now.
Businesses are being squeezed as salaries, interest rates and energy and material costs go up, but payments and price rises can’t be pushed through quick enough to keep pace.
And the turmoil and its knock-on effects can be felt right through the value chain. On top of the supply chain disruption emanating from material shortages and geopolitical upheaval, many businesses now find themselves having to step in to support suppliers at risk of going under or paying many times the normal price for shipping. The delays and disruption are spurring many companies to hold more stock in reserve, which only adds to the gap between cash-in and cash-out.
The challenges are heightened by the uncertainties ahead. We’ve seen the destabilising impact of the Ukraine war. What further threats could emerge to put your ability to meet payment obligations in jeopardy?
Aren’t these the kind of threats we saw during the worst of the pandemic? No. The dynamics have changed.
One of the big differences between now and 2020-21 is that there is much less readily available credit to fall back on.
Lenders are more cautious about who they lend to and are imposing tougher rates and conditions on who they finance or refinance. One of the emerging developments is tying finance to progress on environmental, social and governance (ESG). But many businesses are caught in a bind because they lack sufficient funding to turn ESG commitments into actions.
It’s against this backdrop of mounting economic uncertainty, high supply chain variability and liquidity pressures that cash within your business becomes more critical than ever. How can your business best understand and optimise your cash position? Three priorities stand out:
Precise and detailed cash flow forecasting has never been more important. In an uncertain climate where the potential for further disruption is significant, forecasting should be a business priority. Yet, more than 60% of the companies in an Act Now survey carried out last year had failed to produce 12-month forecasts that planned for a range of best and worst-case scenarios.
Ensuring that evaluations are capturing and maintaining visibility of key data points is the foundation for timely and accurate forecast reporting. Our work with clients highlights the value of effective tools and dashboards to ensure they have the right data at their fingertips, at the right time.
It’s also important to identify the threats that could seriously disrupt your cash flow and have the data and expertise to model your ability to absorb them. If the analysis shows that your business is in danger, what levers can you pull to prepare for and mitigate the risks?
To optimise the cash position and free up funds for investment, it’s important to identify and release cash tied up in the business. Common sources of trapped cash range from excessive inventories to slow payments. Further ways to overcome barriers and boost liquidity include making it easier to move cash from one division or subsidiary to another.
Effective cash flow analysis can provide timely intelligence of where the cash is and how to extract it. But it’s important for management to know what the data is telling them and how to use it effectively.
From production managers to sales teams, everyone across the organisation has an impact on working capital. It’s important that everyone embraces a cash-conscious culture, understanding their impact on the firm-wide cash position and their responsibility to manage it in the most efficient way.
At the heart of this culture is the need to make decisions for cash rather than just profit and loss, along with the performance targets, tracking and incentives to drive this. A thriving cash culture also manifests itself in the zeal to generate it, conserve it and take pride in this as part of day-to-day work. As such, the tone is very much set at the top.
Inevitably, there are common snags and mistakes to avoid in developing this culture. These range from too many people committing the business to expenditure, to leaving all the cash flow analysis and management to treasury and finance. At a time when resilience is critical, there is also a danger of setting minimum cash requirements too low.
So, rather than thinking of cash as simply a treasury issue, it’s important to put it at the centre of strategy and resilience planning. Businesses with a cash mindset are in the strongest position to withstand shocks and invest in growth. To find out more about how cash optimisation can help drive successful restructuring and change, register for a free copy of our From recovery to growth report.