How Midsize Businesses Can Avoid The Cash-Flow Crunch – Today And Tomorrow

Christian Mnich

Part of the “Navigating Disruption Today, Planning for Tomorrow” series  

Finance leaders from midsize businesses are known for keeping a watchful eye on nuanced signals and indicators of potential risks ahead. However, interim results in March 2020 from Oxford Economics’ and SAP’s ongoing survey of small and midsize businesses found that approximately half of finance executives from midsize businesses cite risk management (54%) and spend visibility (45%) as top challenges for their function.

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In many ways, COVID-19 presented a perfect storm of cash-flow issues in a matter of days. Economic detraction fueled by government pressure closed nonessential brick-and-mortar stores and office facilities. Revenue was lost due to interrupted manufacturing operations and overwhelmed supply chains. Even credit risk exposure is rising as liquidity constraints emerge, once-successful hedging strategies fail, access to working capital tightens, and customer accounts become riskier.

If we think about it, this pandemic has magnified the importance of incorporating cash-flow management as an integral part of a midsize company’s strategic plan – no matter the economic condition

A three-pronged framework for improving cash-flow management

Transparency is critical, especially in the context of cash-flow management. With real-time, reliable financial information and transparency, finance leaders can earn the trust of business leaders, as well as those impacted by their decisions.

Financial reporting may not be the first item on a finance leader’s agenda during a pandemic. But when supported by an integrated treasury system, it is the foundation for three critical steps that midsize businesses should take to secure their cash flow.

1. Ensure continuity of finance operations and workforce

Whether finance employees are working remotely or in the office, the organizations must run continuously without any gaps or broken connections in terms of processes, information, and communication. For example, financial systems should be able to support mission-critical activities – such as urgent payments, cash transfers, and trade management – whether the employees are processing them in the office or from a remote location.

Creating a task force in which every business area is represented can also be helpful to identify and plan for potential risk factors based on shared data. Blending data insight with guidance gives finance leaders a real-world view of the business, so it can identify liquidity impact areas and short-term funding requirements across the business. 

2. Manage liquidity proactively

Through times of volatility or steady growth, knowing the company’s financial status is critical. Daily reports on key figures – such as daily cash position; cash-flow forecasting; and structure of free cash flow, working capital, and debt – enables finance teams to roll out liquidity planning for at least 12 weeks

If this kind of reporting is not already in place, financial leaders should consider implementing tools that provide a combination of visibility and predictive analytics. Doing so provides the ability to assess multiple scenarios based on consolidated, group-wide information on cash balances and forecasts in all relevant currencies.

For example, a business applying for a short-term funding or government program can quickly provide its current financial status, cash position, and 12 weeks of liquidity forecasting. The pros and cons of leveraging supply chain financing programs, extended credit lines, or renegotiated payment terms can be also weighed with confidence. Plus, new ways to leverage trapped cash and restructure reverse factoring can be uncovered.

3. Balance risk with opportunity

Analyzing potential scenarios enables finance leaders to evaluate the potential impact of risks and implement prudent strategies to enhance competitive advantage. Plus, they can also fine-tune product and capacity plans by rethinking the implications of commodity risk and monitoring external markets.

Tapping into insights from cash-flow planning analysis, finance teams can adjust their hedging strategies to address a new normal by:

  • Addressing foreign exchange risks
  • Shifting limit management practices for ad hoc tasks
  • Mitigating credit risk within the supply chain
  • Reshaping the funding strategy with extended credit lines and new sources of liquidity
  • Adjusting the ongoing operating model and updating the existing business continuity plan

Respond to the immediate challenge and get ready for what’s next

Whether running in good financial shape, struggling for profitability, or facing low cash reserves, all midsize businesses can become vulnerable to cash-flow instability at any moment. It doesn’t have to take an event so drastic as a global pandemic to experience it.

How do high-performing finance leaders help their business navigate through times of volatility and financial opportunity? It all comes down to a foundation of timely, meaningful, and predictive insight and guidance on the potential implications on the business’s financial status, performance, and viability.

For further exploration on how financial managers can navigate disruption today while planning for tomorrow, watch our mini-webinar, “Weather Financial Uncertainty with Strength and Resilience.” 

This blog is part of a series offering suggestions to help small and midsize companies weather the challenges related to the pandemic. You can find other blogs in the series at the archive page, Navigating Disruption Today, Planning for Tomorrow.

This article originally appeared on Forbes SAP BrandVoice.

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Christian Mnich

About Christian Mnich

Christian Mnich is Vice President and Head of Solution Management for Treasury and Working Capital Management at SAP. He joined SAP in 2004 as a product manager for ERP Financials and was responsibility for the topics such as payments, cash management, and bank connectivity. Furthermore, Christian was in charge of development around global payment formats such as ISO20022 and Single Euro Payments Area (SEPA). He is a regular speaker at international treasury conferences and author of articles in specialist publications on a variety of treasury related topics.