Special forces: How a liquidity council accelerates cash flow

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:

• Functional silos that reduce cash-performance visibility and lead to uninformed decision-making.
• The inability to see where and why cash is tied up, which prevents firms from better coordinating efforts across their commercial, finance, and supply chain functions.
• Limited adoption of digital technologies, like artificial intelligence (AI) and analytics. Companies may have access to data and intelligence, but they struggle to put insights into action.
• Poor cash-forecasting accuracy that leads to inadequate investment planning and an inability to respond to early payment requests from suppliers.

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:

• Make sure improvements to the cash-conversion cycle are sustainable.
• Adopt digital capabilities to generate actionable insights and eliminate the need to work across silos, rework errors, and process backlogs.
• Re-architect working capital management models to make them agile.

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:

• Use models built on business knowledge powered by AI and advanced analytics to improve cash-flow forecasts and cash-position predictions.
• Unlock data-driven intelligence and insights around default risk segmentation, ordering, and payment behavior.
• Revamp policies and processes on bad-debt write-offs, payment terms, and claims using predefined modules and algorithms.

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:

• Cut days sales outstanding by reducing the percentage of past-due invoices and improving collections efficiency, deductions management, and receivables write-offs.
• Strengthen supplier relations by rationalizing payment terms and improving the percentage of invoices paid on time. This also eliminates interest and penalties, and improves days payable outstanding.
• Maintain a resilient supply chain without any incremental cash outflow by enabling early payment opportunities for critical suppliers with funding partners.
• Reduce inventory outstanding by improving inventory turns and forecasting accuracy.

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.

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.

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.