- Point of view
Special forces: How a liquidity council accelerates cash flow
When disruption hits, all eyes turn to cash management
The response to COVID-19 has pushed working capital to the top of the boardroom agenda. Liquidity has become critical to many businesses' survival and has the attention of the whole company, not just finance. What's more, leaders have increased the frequency of their cash-demand forecasts because decisions they previously made quarterly must now happen daily.
As organizations know that further economic shocks lie just around the corner, no chief financial officer will be forgiven for failing to plan ahead. So, what immediate steps can they take to stabilize and strengthen cash flow and mitigate uncertainty? The answer: set up a task force to accelerate cash conversion.
A central liquidity council brings together a potent blend of cross-functional experience, skills, and perspectives from across the organization. Its mission is to monitor, manage, conserve, and unlock cash. By using a coordinated end-to-end approach, the council can focus on increasing short-term cash availability while also making longer-term structural improvements for superior working-capital performance.
The pandemic is a perfect storm, causing supply chain disruption, a build-up of inventory, price fluctuations, and revenue loss. In addition, customers want to extend payment terms, while suppliers seek early payments to address their own cash needs.
Within organizations, efforts to improve cash management are hampered by:
Without a clear view of their working capital, many businesses can't make the investments they need to survive today's uncertainty and return to growth. They face having to borrow at higher interest rates, offload inventory at deep discounts, defer payments, which puts supplier relations at risk, and default on loan repayments.
So how can a liquidity council solve these issues and accelerate cash flow? And what skill sets and experience does it need? Your team should bring together the cash leads from various business units, and subject-matter experts from functional areas such as receivables, payables, supply chain, and data analytics. This task force will generate diverse thinking and approaches to break down silos and help identify key problem areas. And it will generate actionable insights and clearly defined solutions that improve cash conversion.
With representatives from all teams working together, the council can identify the best way to combine approaches across receivables, payables, and inventory to deliver three-to-five key initiatives.
These activities would include short-term actions, such as reviewing overdue payments and deductions, revising collections strategies, rationalizing payment terms, improving cash forecasting, and enabling supplier resilience. They would also paint a clear picture of long-term structural changes, like rethinking inventory planning, advancing demand sensing, reducing product portfolios, and introducing supply chain financing.
The council sets the foundations for long-term structural improvements by developing an end-to-end process view of how an organization should manage its working capital. This enables the company to:
A liquidity council also features rapid-analytics pods. These data-science professionals follow a hyper-agile delivery model, have deep forecasting skills, and use external sources and models - such as social media, publicly available data, and supply chain simulations - in their work. Coupled with the council's holistic view of the business, the pods can deliver an immediate and visible impact on cash performance.
How do companies sharpen cash-flow projections with data-led intelligence?
By establishing a cash-focused task force, your business can:
As your organization manages cash, a liquidity council can build a strategy that balances the business' short and long-term working capital management needs that:
Global uncertainty has triggered the need for companies to rethink their working-capital strategies. Assembling a targeted task force allows you to implement well-defined operating models supported by digital solutions and data-led insights. And with improved liquidity and working-capital efficiency, you'll unlock vital funds that build long-term resilience for both your business and its ecosystem.
Case study
A leading manufacturer of beauty products set up a liquidity council to strengthen the company's cash position for the following year. By concentrating on supply chain, procure to pay, and order to cash as transformation levers, the company aims to realize $800 million of positive working-capital impact.
Case study
As COVID-19 impacted this global healthcare company's operating cash flow, it set up a liquidity council to generate $300 million in cash-flow improvement over the mid-to-long term.