How to Protect and Manage Cash Flow When It’s Mission-Critical

As the ‘cash is king’ mantra sums up, you always need to know where the cash in your business is and how to best protect and manage it. And during times of change, it’s especially important.


In recent years, many businesses have focussed on their profit and loss statements. But now many businesses will be closely scrutinising their cash flow statements to get more accurate, short term visibility into available cash flow. Because whether you want to take defensive action to protect your business or positive action to capitalise on opportunity, you need to know where things stand when it comes to your cash.


So how exactly do you prioritise cash in your business during a crisis or time of downturn?


Like many others, including leading consultants such as McKinsey & Company and Bain & Company, we say good practice follows a three stage approach. The stages take you through the present moment and into the weeks and months ahead. Different organisations give them different names, but for simplicity, we’ll call it Respond, Recover and Reinvent. Here are some of the key features of each stage.


Respond to the Immediate Challenge

First of all, create a ‘cash war room’. It will be led by the senior finance person and include senior leaders from across the business, including sales, operations and HR. When you’re all in the same room (even if it’s only virtually at the moment), it focuses everyone’s minds and makes decision-making much more rapid.


The next step is to prepare a 13-week cash flow forecast. This will show exactly where you are right now and help you with monitoring, planning and forecasting. Once it’s in place, update it weekly and compare projections with reality.


Next, be decisive when it comes to preserving cash. It’s likely you’ll need to start reducing spending immediately. You should also start reviewing and challenging all spend on a daily basis so everyone gets on board with the need to reduce spend and preserve cash.


Once you’ve got the basics in place, look at a range of scenarios from best-case to worst-case. This will help you assess how exposed you are, stress test your finances and – most importantly of all – allow you to develop contingency plans.


Finally, if cash is king, so is communication. As we touched on above, it’s vital that everyone in the business understands how important it is to preserve cash and is on board with making it happen.


Recover Your Trading Position

Once you’ve steadied the ship, it’s time to turn your attention to the next stage. All the signs are that we are likely heading for a recession in the UK, so you need to take steps to reduce operating costs and make sure you’re equipped to cope.


This will include boosting productivity. This isn’t just a good way to cut costs. Research from McKinsey shows that during the last economic crisis, a small group of companies made bigger productivity improvements sooner and then more frequently than others. This created the capacity for growth during recovery and they significantly outperformed their competitors over the following decade.


Take a deep dive into the detail of the balance sheet too. You might look at areas such as debt refinancing, reducing inventory, and accounts payable and accounts receivable terms. Also encourage leaders to re-evaluate any capital projects and consider where funds could be better spent (if at all).


Finally, keep being vigilant with the numbers. Accurate budgeting and forecasting are essential, as is knowing what the key performance indicators are for your business. This information will be vital for the whole business to make decisions with confidence.


How Finance Can Support the Business on the Path to Recovery

Join this insightful webinar in partnership with Bain & Co which explores all the areas finance leaders can practically examine now to help the business on its path to recovery.


Reinvent for the Next Normal


At some point, we will come out the other side. It’s at this point you’ll want to make the bold moves that will take you forward in the new normal. Bring together a team of senior leaders who look at strategic planning, leaving no stone unturned.


The key here is to adopt a transformation mindset. The chances are, the crisis has forced you to make big decisions. You can and should maintain this transformational thinking – think big in every area.


Consider mergers and acquisitions too. Whether it’s divesting yourself of unprofitable divisions to release capital or acquiring new businesses at a reduced cost, actions in this area are useful for growth. But remember that research shows that companies that bought ‘little and often’ (rather than going for the one-off ‘big bang’) outperformed their competitors in the last downturn and subsequent recovery.


Finally, look at the value of digitalisation. The sudden shift to remote working has meant many companies have turned to technology and automation to keep the business running. But they can be so much more than a short-term solution.


Much of the best practice advice for managing cash when times are tough rely on having instant, real-time access to detailed, accurate numbers. Tools such as those that automate expense, travel and invoice processes, don’t just enable remote working, they also give you the control and visibility you need to undertake the respond, recover and reinvent stages with much greater speed and confidence.


For more helpful advice, visit our Supporting Business Continuity hub.

Loading next article