Liquidity scenario planning: Projecting cash flow, surviving in the short term and thriving long-term

For many businesses, surviving the COVID-19 economic downturn depends on managing liquidity and, more specifically, managing enterprise cash. The erratic timing and extent of various disruptions caused by the COVID pandemic may reduce cash on hand, threaten future cash flows and curtail the ability of a business to meet immediate obligations. Uncertainty over the ability to pay employees and creditors, to withstand supply chain shocks and to maintain other important operational functions highlights the importance of liquidity scenario planning to business sustainability.

In order to effectively manage through the crisis brought on by the pandemic, an organization facing liquidity issues must perform detailed analysis of direct cash flow projections, assess the impact on net working capital and inventory management, and further, extend management decision-making through the associated tax incentives. The goal is to quickly create an action plan that enables the business to continue operations in the near term, and, as the crisis wanes, to eventually get back to business as usual.

Forming the team
The first step organizations should take is to form a crisis liquidity team It should consist of company executives and may include outside advisors. The team should be supported by personnel who can provide relevant information in a comprehensive range of areas, including operations, procurement, service or production delivery, distribution, sales, technology and human resources, focusing squarely on how each component impacts the business’s cash position.

Aggregating data that helps track daily, weekly, and monthly cash flow activities is also critical to the process. Organizing that information in an easily consumable dashboard format for executives enables effective decision making.

Estimating how long this is going to last, is anyone’s guess. But organizations need to be able to look at it, 30, 60 days out from now, 90 days out from now with enough specificity to make critical operating decisions.

Managing a work force through a pandemic with no clear time frame presents another challenge. Deciding to permanently reduce staff could hinder a business’s ability to restore its capacity after the crisis, while simply furloughing employees could enable greater mobility.

Managing relationships and inventory
As the liquidity crisis team collects data, it’s critical to understand what cash the company expects to receive in the near term. Recognizing that the business’s customers and vendors are also facing similar uncertainties, the company has to work with those parties and with creditors to come to favorable terms for all.

The liquidity crisis team should review the company’s inventory management strategy and determine if there is a way to reduce costs. Certain businesses are able to adapt an inventory or manufacturing system in which inventory is not stockpiled but rather obtained from suppliers on an as-needed basis. Adopting such an approach, assuming a supplier can ensure delivery on time, may save significant costs related to the purchase of materials and storage.

When developing the cash flow dashboard, a company should make sure the projected receipts and disbursements are realistic and achievable. If the assumptions to cash flow are not realistic, the projection will be of no use. A conservative approach is best.

Once the projection model is up and running, you will need to reevaluate on a continual basis. Some decisions made on Monday will not be the decisions you continue to go forward with on Friday or the next week. Continual re-evaluating initial steps, rethinking, and then rebuilding cash flows from those, is important.

Contact your CPA at Ricci & Company for more information. © 2020

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