Solving for liquidity, profitability and enterprise value in uncertain times

May 1, 2020

The COVID-19 crisis is driving fundamental changes in consumer values, supply chains, and routes to market, knocking companies off balance. Immediate action is needed to address short-term liquidity challenges, but also to solve for costs and profitability and generate funding to invest in new opportunities. While some shifts are temporary, other things will never be the same: The new normal will be “never normal”.

Many CEOs are faced with plummeting sales and revenue and increased costs. Interventions to adapt may require investments in key technologies, processes and people. For some, liquidity has become a matter of survival.

The question on every CEO’s mind is: How long will this last? While possible scenarios range from quick recovery to prolonged chaos, there are five key levers available to outmaneuver uncertainty:

Manage liquidity
Financing and credit
Eliminate or reduce costs
Government aid programs
Portfolio management

Financial levers pulled Now and Next set the foundation for success in the Never Normal.

Managing liquidity in response to COVID-19 crisis

Although financial priorities will shift over the next months, companies that will emerge stronger are those that best balance short-term liquidity and cost pressures in the Now with the right investments in new growth opportunities in the Next, and their responsibilities towards stakeholders and society in general.

Generating cash and liquidity NOW

Take liquidity control tower to the next level

Most organizations have a financial control tower but lack real-time visibility and understanding into their liquidity positions. Few, if any, use analytics and behavioral modeling to predict what liquidity will look like based on business decisions. Finance should take full and centralized control of all liquidity decisions, supported by cash management analytics solutions.

Model and optimize working capital

Working with the business and leveraging data, the liquidity control tower can model working capital pain points and help pinpoint key actions to generate cash. Predictive analytics help proactively identify and monitor invoices with a high likelihood of rejection and disputes. Likewise, increased visibility and controls can ensure that the right discounts are being applied in accounts payable.

Review CapEx portfolio and governance

The liquidity control tower can help organizations better manage CapEx by ensuring better capital allocation decisions and improving certainty on in- and out-flows of cash. The liquidity control tower team provides insights to challenge predictions on CapEx returns and paybacks and provides both CEOs and CFOs control of all decision-making before the investment is made.

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Here’s how to improve profitability NEXT

Reset the company’s cost baseline

Many companies have resorted to eliminating or drastically cutting costs. These immediate measures are not sustainable. Once the crisis stabilizes, the next priority is to reset the company’s cost baseline for the new reality. This year’s budget will likely need to be redone. New consumer values have surfaced, new opportunities will present themselves and new ways of working will become engrained.

Variabilize costs as much as possible

Managing in uncertain times means minimizing risks and variabilizing costs as much as possible. For example, moving to the cloud and software-as-a-service variabilizes fixed technology costs such as data center operational costs and software licenses. Production, distribution and logistics can be outsourced to third parties to reduce fixed supply chain and manufacturing costs and risks.

Reinvest in growth

Striking the right balance between cost and profitability and reinvesting for growth is important. New opportunities will arise from this crisis and the current competitive landscape will change. This is the time to truly understand changing customer behaviors and preferences. Continued focus on cost reduction will provide the funding to invest in these new opportunities and future growth.

Drive ongoing culture and behavior change

This is a unique opportunity to drive a broader ownership culture for costs in the organization and to mobilize the broader organization around ideas to develop smarter ways of working and spending money. This will generate additional savings year over year to fuel growth.

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Bar chart showing share of earnings and other C-Level speeches talking about: Finance, Customer & Sales, Supply Chain & Operations and Technology Strategy.

Finance issues make up, on average, one-quarter of CEO discussion topics as they relate to COVID-19 crisis

Reinvest to take advantage of new opportunities

Understand changes in customer behavior

Like any crisis, COVID-19 will result in changes in customer behavior, ways of working and people’s values and behavior. Understanding these trends early is critical to capture these opportunities, grow and become even stronger.

Re-evaluate the competitive landscape

This crisis has the potential to drastically change the competitive landscape in some industries; some of the current competitors might not survive, while new ones might emerge. Running scenarios to better understand the new competitive landscape can drive the future growth strategy.

Reinvest for growth

Implementing discipline around cash and cost management will generate further efficiencies year over year. These efficiencies should be reinvested in strategic initiatives to capture the new growth opportunities and emerge stronger from this crisis.

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Great leaders will be defined by how they lead strategically and operationally in the moments of crisis. As CEOs and their teams wrestle with the financial implications of market and operational uncertainties, they should proactively focus on economic viability, cost efficiency and competitive moves. This balanced approach to bolstering total liquidity, improving profitability, and setting the course for ever greater levels of enterprise value will allow enterprises to not only survive—but ultimately thrive and emerge stronger.