Global Pandemic: A Case for Cash Preservation Strategies

COVID-19 took the world by complete surprise, a typical “Black Swan” event. It has forced businesses to immediately focus on the key elements that matter most for survival.

Many leadership teams have moved quickly to set up CEO war rooms (senior, dedicated, cross-functional teams that are empowered to make rapid decisions) to:

• Understand the risks to their business
• Protect and support their employees and communities
• To address urgent priorities in a fast-changing environment
• Communicate with staff and customers
• Adjust operations to meet demand
• Comply with regulatory changes, and
• Help contain and mitigate the spread of Covid-19

The challenge ahead is weathering a downturn in the economy and the global supply chain disruption, neither of which should be underestimated. Some companies simply will not survive. Most are likely to experience a sustained slump in revenues and profits.

Businesses have put in place measures to:

• Ensure they have a robust framework for managing supply chain risk
• Their financing remains viable
• Focus on the cash-to-cash conversion cycle, observing the cash impact of actions across the supply chain management process
• Assess and reduce both fixed and variable costs appropriately
• Potentially defer capital investment plans
• Focus on stock levels
• Optimise working capital positions.

The full impact of this epidemic on businesses and supply chains is still unknown. One thing is certain however: this pandemic will have global economic and financial ramifications that will be felt throughout global supply chains, from raw materials to finished products.

Companies are also now turning their attention to their financial health knowing that the economic crisis triggered by the pandemic could very well lead to a cash shortage that threatens some companies’ survival. Businesses that are currently struggling for profitability and those with low cash reserves are particularly vulnerable.

In the current abnormal business conditions, companies are shifting their focus from the income statement to the balance sheet. Knowing the impact of your companies business inputs and their impact on your working capital will determine the free cash flow (FCF) available.

Some companies have created a central cash “war room” with the sole focus on activities to ensure cash preservation. Thes activities include:

• Developing a single view of the liquidity position and the consolidated outlook for the entire business.
• Launching decisive actions to preserve cash, including deferment of Capex and reduction in variable costs.
• Controlling all cash outflows with strict working capital management practices.
• Preparing enterprise models based on different macro scenarios.

However, once you have reorganised your business for today's scenario and created your macro scenarios, you need to immediately consider how this will change tomorrow. In complex organisations, even the smallest variation to a key input can materially change the outcome of Free Cash Flow (FCF) in the months ahead. Potentially requiring you to change tack or perhaps provide for additional finance in the future to meet your commitments.

Successful organisations understand the importance of having a strong Budgeting and Forecasting (B&F) software solution, that goes beyond error-prone and laboriously manual spreadsheets.

What if you could instantly reassess any of your business inputs, be they raw material constraints (prices or volumes), processing costs, or selling assumptions, with confidence that the result is both accurate and transparent to the leadership team.

Our client, a globally diversified mining company, can do exactly that and immediately receive a full set of consolidated Financial Statements, including the most detailed Cash Flow statements for their current and future year forecasts.

Using our proven budgeting and forecast modeling technology based on IBM’s Planning Analytics (PA) powered by Cognos TM1⃰ , we have developed a full end-to-end planning tool that incorporates all their operations around the globe. Instantly allowing them to assess the sensitivity of any input change on their FCF position and Profitability. The model can immediately recalculate their global consolidated results (with a full Balance Sheet, Income Statement, and Cash Flow) for any change in assumptions.

These assumptions and inputs can include any key driver for your business. They could include:

• Consumer Price Indexes per currency/country
• Foreign Currency Exchange rates
• Raw Material and Consumable price curves
• Variable Cost inputs
• Headcount and Contractor numbers
• Sales Price calculations
• Volumes (Production and Sales per Material)
• Working Capital days held
• Taxation and Royalty Rates
• Dividend Payments and Share Buy-backs

Our models ensure a balanced trial balance and journal entry postings for every movement, so they can instantly see, for any operation, where the change in the FCF or Profitability arose. There are no “black-box” calculations.

With over 20 years of experience in the industry, and a depth and breadth of skills ranging from Chartered Accountants to IT technical resources.  Bold Shore can deliver solutions that meet the financial planning needs of its clients.

⃰ IBM’s Planning Analytics (PA) powered by Cognos TM1, provides an enterprise planning software platform that can transform your entire planning cycle, from target setting and budgeting to reporting, score-carding, analysis, and forecasting.

PA is available as an on-premise or can be hosted on-cloud with mobile capability. PA enables you to collaborate on plans, budgets, and forecasts. You can analyse data and create models – including profitability models – to reflect a constantly evolving business environment. It helps you monitor performance metrics and align resources and initiatives with corporate objectives and market events.

If you would like a free demonstration please contact us.