Kick the liquidity tyre: Five ways to protect cash

Your expert for questions

Thomas Steinberger
Business Recovery Services Leader at PwC Germany
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Act now. Five steps to manage liquidity.

So let’s talk about cash. It’s tempting during a recovery for businesses to focus on growing the top line, cutting costs, and exploring strategic options such as selling parts of the business. With all the competing priorities of a crisis and a recovery, it's easy to take for granted that the cash position is visible, accessible and will ultimately look after itself. In the aftermath of the Global Financial Crisis and other regional health crises, we saw many companies recognise the benefit of doubling down their efforts on liquidity management to avert the worst case scenarios, but in many cases, was left too late.

The lag between cash position and the impact on the P&L is difficult to predict in a situation like this. To put it bluntly, we don’t know how or when consumers are going to start spending again, and many businesses, particularly those in hospitality, leisure and travel, are starting from an income base of effectively zero. Spending levels may not reach pre-COVID-19 levels for months – or years, if more lockdowns are necessary.

With that in mind, here are five essential steps that help to protect liquidity:

• Make cash everyone’s business. Every hour of every day, people in all parts of the business make decisions that have direct implications for cash and the liquidity of the organisation. Payments are committed to and contracts are written that dictate the timing of cash outflow. Some functions might incentivise behaviour that could compromise liquidity (the priority for procurement, for example, will be price rather than cashflow). It’s essential that everyone making these decisions understands the vital importance of protecting liquidity. A cash-conscious culture is a must.
• Stem the flow of cash at its source. Where does cash leave the business, and are there alternative options? Are employee incentives paid in cash, and could these be substituted? Does pension contribution policy need to be amended? The timing of cash outflows should be a critical consideration in the negotiation of every contract. No-one in the organisation should commit to expenditure unless it’s absolutely essential.
• Involve more people in forecasting. Cash flow forecasting shouldn’t be seen as just ‘something that finance does’. Many people make decisions that affect cash so build forecasts from the bottom up, involving the right people, from functions that make cash-related decisions, from the start.
• Think outside the box when it comes to scenario modelling. There’s no such thing as a generic business – individual businesses within sectors (such as retail) have wildly different post-pandemic recovery profiles – and this needs to be reflected in scenario modelling. Scenario testing should also take into account the way our behaviour has changed. We’ve seen a number of businesses, for example, make ethical decisions about when they pay particular suppliers in order to support the most vulnerable. We’re all in COVID-19 together, and that has changed ‘normal’ behaviour.
• Explore the full range of cash management options. Negotiated deferral of tax payments, lender relationship management, optimisation of working capital and identification of trapped cash, management of supplier payments, forecast to fulfil inventory, reviewing treasury processes, and cash pooling all have a role to play.