Strengthen Your Cash Position in the Covid Crisis

How to get started with working capital improvements to free up corporate liquidity, both for surviving the crisis and improving cash management in the longer term.

With a recession looming, cash and liquidity needs are vital for businesses. Flagging consumer demand and supply-chain disruptions are straining cash and working capital. The continued market and economic uncertainty will only extend the challenges.

The immediate crisis caused a severe liquidity crunch as banks and investors pulled out of corporate debt. However, the threat to liquidity will not dissipate even as recovery starts, because the credit markets are factoring in default and earnings risks into corporate borrowing spreads. During the first quarter, the Federal Reserve intervened repeatedly to buy corporate debt and commercial paper to inject liquidity back into the market. Even if rates remain at record lows, that risk premium will stay with us for some time.

Cash is king—even for companies that entered the year in a strong cash position.

While most companies have been focused on managing the impacts of the global coronavirus pandemic, now is the time to immediately develop and execute a turnaround strategy. This should include a sound plan for preserving cash, releasing cash tied up in working capital, taking advantage of the stimulus funding and near-zero interest rates to restructure, and potentially increasing use of debt to enhance liquidity and fund strategic growth opportunities.

Organizations that can improve their cash position by tightening up accounts receivable (A/R), accounts payable (A/P), and/or inventory processes will be better positioned to handle the difficult external environment that most companies will face in the coming months.

However, before making any strategic decisions at this critical moment in time, a treasury team needs a full view of its cash conversion cycle. Key to understanding the improvements with the most potential is benchmarking the company’s various working capital metrics against the norm for its industry.

Industry Benchmarks for the Cash Conversion Cycle

The current crisis has had very different cash consequences across industries—and even within certain industries. For example, specialty retail has taken a hard revenue and cash hit, as its businesses have largely been shut down, at least on the bricks-and-mortar side. Meanwhile, retailers of food and staples have seen a revenue and cash boost due to consumers stocking up on essentials and, in some cases, panic buying.

Likewise, the level of opportunity available to boost cash flows by working capital varies by industry. Some industries with smaller working capital opportunities under normal conditions may now face significant disruption and ongoing economic uncertainty. For example, automotive parts demand has been disrupted by consumers’ self-isolation and vehicle manufacturers’ production halts. Organizations in the auto parts sector may be sitting on inventory piles with payables due, while they watch revenue decline and worry that demand may still be disrupted for months to come.

Airlines have experienced a massive decline in international and domestic travel. To some degree, the impact is mitigated by reductions in their fuel purchases and labor costs, but treasury teams in the airline industry are still having to figure out how to cover A/P with drastically lower revenue and A/R.

Even industries that have experienced only minimal disruption may find it necessary to address their working capital opportunities at this particular moment in time, due to expectations that they will face challenges in the near future. For example, although demand for medical specialties and services has increased, these organizations must be able to manage future inventory and sourcing needs as non-pandemic demand patterns re-establish themselves. These medical providers also face challenges in collecting receivables from healthcare systems that may be cash-deficient due to costs incurred during the coronavirus crisis.

Railroads and trucking organizations have seen revenues increase due to the need to redirect shipments of essential products and groceries. Looking ahead, though, they will need to be careful that customers are in a position to pay open balances and that A/R balances do not become overdue.

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