I was recently speaking to a CFO of a fairly large company about how he was managing in these turbulent times, and he simplified his approach to me by borrowing from what airline pilots are taught: Aviate, Navigate, Communicate. This made me reflect on what questions CFOs and Treasurers need to be asking themselves and what tools will be needed to get them through these times and beyond, which is aligned with the cash war room concept in this article.
The first job is to ensure the business is stable and has the cash to survive the downturn. Questions that CFOs are seeking answers for are: Do we have enough visibility on our current cash balances to meet current and expected operational expenses?
Most Treasurers use spreadsheets for reporting on cash balances or for short-term forecasting which is useful but not helpful in the next 2 steps beyond surviving. What Treasurers need is a robust, yet flexible liquidity management tool and dynamic cash forecasting tools.
The most relevant solutions that are needed are:
1. Real-time centralized cash management.
Tools like API-based digitized in-house banks can provide real-time balances. They use virtual accounts which reduce the need for every subsidiary to have its own ledger account, yet have access to working capital. Rationalization of bank accounts will lead to untrapping liquidity that was previously held in multiple bank accounts.
2. Flexible Cashflow Forecasting with clean data tied to ERPs, Bank Transactions etc.
What is needed is just not base-case cash flow forecasting, but also scenario analysis and stress testing. They should be able to answer questions like how much cash do I need if Covid-19 affects the economy in the Fall? What if demand goes back to previous levels 6 months later, 12 months later? What strategic options can I support my firm with?
3. Smart Cost reduction
What costs can be taken out? Are my expenses well matched to my revenues to drive optimal unit economics to support budget decisions? The easiest place to start to reduce costs is in inter-company transactions. Can I use a netting system instead of making cash transactions to settle inter-company payments. What can I do to optimize my order-to-cash or procure-to-pay cycles?
4. Risk mitigation through structures like captives.
With the insurance markets beginning to harden, can a captive be used to under-write risks at a lower costs but also protect against such extreme unforeseen pandemic risks.
As corporates get stabilized, the next challenge is how to ensure there exists enough liquidity to flexibly optimize among strategic trajectories? Once we are on a path, how do we stay on top of KPIs in real-time to ensure we reach our destination. The future is more uncertain than before, so how can CFOs navigate as demand and supply side realities evolve.
This is a critical role for CFOs and as importantly, Treasurers to play a strategic role in their organizations future. The most relevant tools here are
A real-time dashboard for KPIs - fed from data from the past but with the relevant inter-connected relationships - This can incorporate real-time data as well as targets one is tracking towards. Actual expenses versus budget expenses for eg.
Flexible workflow tools to automate operations that supports remote workers and collaboration. Create authorized workflows on the fly, without the need for an extensive set of consultants. For eg. workflows for inter-company loans if one needs to move liquidity from one group entity to another with all the relevant compliance checks in place in real-time.
Digitizing operations. Let’s boost productivity through digitized operations. It’s time to eliminate paper checks and their manual processes and replace them with real-time payments. Tools like virtual accounts for customers can be used to reconcile outstanding A/R in real-time.
Once a chosen path is chosen by management, communicating that to make sure they are in synch with their stakeholders - employees, investors, customers, suppliers, partners is important?
The most relevant tool here is data that answers-
- Am I communicating accurate KPIs with my board and my investors and relevant internal stakeholders? How do I keep product teams accountable?
- Is my balance sheet optimized and in the top quartile of my peer group? How can I use my balance sheet strategically to secure the best outcomes from my supply chain? Dynamic Invoicing, Funding customers purchases, perhaps?
- What data can I provide my banks to ensure I get the optimal borrowing rates? Can I provide real-time balance-sheet driven ratios to be compliant with loan covenants?
It’s time to think about what “We are all in this together” means to our operations. CFOs, Treasurers, Controllers, FP&A teams, Cost Accountants, Legal, Tax Advisors all need to work together as a cohesive unit or atleast with a cohesive single source of truth and workflows tied to this data that cuts across these departments and separate systems. It's time to lead organisations out of the crisis and put efficient tools in place to dynamically navigate to existing and new opportunities.
We are inspired by these challenges and are on a mission to build the next financial infrastructure for the Enterprise market. It is time to let go of legacy systems (still dependent on Cobol programmers in some instances), siloed data and siloed teams and the old way of doing things. This is 2020. Let’s make a change that is meaningful, We invite your opinion, feedback, comments. Let’s build together!