Managing total liquidity in response to the COVID-19 crisis

While national governments respond to the COVID-19 crisis with public health initiatives and economic stimuli, businesses are still charting the right course of action¹. They need to protect their employees and be relevant to their customers, but they also need to safeguard the future of the organization. Actions taken now by the chief financial officer and the finance function can have an immediate impact on the survival of the company, how quickly it rebounds from the global downturn, and its financial health and sustainability going forward.

An analysis of the Altman Z-score, conducted by Accenture, found that of the S&P 500 companies, 210 companies were in the distress zone in late March 2020. The distress zone suggests a considerable risk for many companies of going into bankruptcy in the near future.

The time to act is now

As CFOs safeguard total enterprise liquidity in this time of crisis, they should ensure they have two capabilities supporting the core of finance and liquidity management activities:

In the immediate term, CFOs will undoubtedly secure and strengthen existing financing sources and look to create breathing room by cutting non-essential spending. At the same time, CFOs should leverage the liquidity control tower to improve cash flow.

With these elements in place, the CFO and finance team can then undertake initiatives.

1. Modeling for working capital management
   Working with the business lines and leveraging data, the liquidity control tower can model working capital pain points (such as persistent late payments by customers and the probability of raising disputes) through predicting invoices with high probability of rejections or disputes due to price-quantity mismatch or improperly coded service description.
2. Insight-driven procurement
   The liquidity control tower leverages spend optimization capabilities and coordinates with Procurement to analyze all open purchase orders and reduce non-essential spending. These insights allow the CFO to identify large areas of spend and indicate possible commercial renegotiation of rates and payment terms, including payment deferment.
3. Global cash visibility and control
   Many organizations lack full real-time cash visibility and an understanding of the cash liquidity potential. The liquidity control tower enables full end-to-end visibility and control of liquidity decisions, supported by cash management analytics solutions incorporating business and regulatory insights. This can help drive maximum value from the capital structure while freeing up stranded cash in the short term.

Recover from the economic shock

Once immediate steps to improve cash flow are in process, the liquidity control tower can focus on building scenarios with dynamic supply and demand planning options. These scenarios leverage agile frameworks and diverse data sources, including macroeconomic factors reflecting the impact of COVID-19.

1. Scenario modeling for demand scaling: The liquidity control tower can adjust demand and supply forecasts based on what-if scenarios using analytics modeling tools.
2. New CapEx governance: The declining business performance, increasing liquidity constraints and overall dilution in return on invested capital are likely driving many companies and industries to take drastic decisions on cancelling CapEx investments. The liquidity control tower can help organizations with CapEx governance by ensuring better capital allocation decisions and improve certainty on in-flows and out-flows cash.
3. Stress test simulations of the supply chain: The liquidity control tower works throughout all stages of the supply chain to drive simulations and analytical scenario modelling with multiple options across demand, supply, inventory, logistics, and networks.
4. Supplier market intelligence for production continuity: The liquidity control tower can identify risks to the supply chain related to dependencies on key suppliers and use supplier market intelligence to identify alternate suppliers that are economically viable from non-affected proximity regions to ensure production continuity.
5. Securing new funding sources: The liquidity control tower can help identify and analyze FinTech and non-banking funders as sources of flexible and cost-effective capital and to link company financing programs with clients’ and vendors’ value chain financing needs.

Re-think how things could and should be done

In the early phases of recovery, the liquidity control tower continues to help organizations increase their agility and respond to rapidly changing conditions. CFOs should invest in the technologies and skills needed to accelerate decision making to grow the business.

1. Real-time cash forecasting
   The liquidity control tower needs online access to near-real time cash position data, as well as the modeling and analytical ability to simulate cash forecasts across a range of scenarios. This requires constant input from Corporate (reflecting top-down decisions) and bottoms-up realism from the business lines, all captured in a driver-based cash forecasting model.
2. New technology enablement
   Companies can and should adopt new ways of leveraging Human + Machine augmented solutions. These can be powered by techniques such as data, analytics and artificial intelligence as well as information extraction, dialogue management, fuzzy matching and reasoning. These solutions help provide close and continuous monitoring leading to better visibility into the company’s cash position.
3. End-to-end investment and returns visibility
   The control tower should be able to view end-to-end performance across the value chain from marketing to production to fulfillment and servicing. Availability of integrated data can help CFOs to initiate ongoing evaluation of investments, revisit the returns of committed projects and reassess resource allocation, with all cash returns modelled to portfolio profitability.
4. Own the ecosystem
   Successful portfolio management should reflect changes in the company’s risk appetite as well as changes in the ecosystem and potential growth areas. The liquidity control tower can be the arbiter of transparent investment analysis based on reliable data, using standard and stable analytical tools, and can help balance returns against risk.

Envisioning a post crisis world

A comprehensive liquidity control tower approach – using data, analytics and innovative technologies to obtain a clear picture, make the right decisions, and develop a plan for recovery and future growth – offers CFOs a way to deal with current volatility while building an enterprise that is fit for a post-crisis world.