Conserving Capital in the Time of COVID

For financial executives, pandemic-related provisions of government business loans via the CARES Act and potentially forthcoming HEALS Act could be offering a false sense of security.

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FEI's Dillon Papenfuss spoke with Anthony Jackson, a Deloitte Risk & Financial Advisory principal in corporate restructuring, Deloitte Transactions and Business Analytics LLP, about how the complexities surrounding capital management will change as the pandemic continues.

FEI Daily: How do you think the complexities surrounding capital management will change as this pandemic continues?

Anthony Jackson: As the pandemic and uncertainties continue, managing working capital should remain a priority for financial executives and the rest of the C-suite.  The COVID-19 pandemic has made working capital management relevant for virtually every organization.  During our recent poll, we learned that nearly half of polled executives (48.5%) have increased the frequency with which their organizations are updating working capital management efforts as a result of COVID-19.  Just 3.2% of respondents reported decreasing that frequency. As uncertainty continues, financial executives would be wise to spend some time focusing on creating better processes, gaining better visibility, and honing strategies for working capital improvements.

Further, for US financial executives, pandemic-related provisions of government business loans via the CARES Act and potentially forthcoming HEALS Act could be offering a false sense of security.  Some may be tempted to delay exploration of other meaningful and potentially long-term solutions to managing working capital as the pandemic continues.  Our executive poll showed that 37.5% were concerned that access to cash on hand – both liquidity (18.3%) and accounts receivable (19.2%) – placed the greatest strain on their organizations’ working capital management efforts.

FEI Daily: What are some of the main areas that companies are looking to conserve capital?

Jackson: Because of the broad ranging impacts of the COVID-19 pandemic, companies are looking at all options to conserve cash by both reducing cash disbursements and trying to increase cash inflows.  On the disbursement side, companies have stopped discretionary spending (i.e. training programs), stopped or delayed capital expenditures, pushed out payments to vendors, and looked at ways to decrease payroll expenses through layoffs, furloughs, or wage decreases.  To increase cash coming in, companies have looked at options to sell non-core assets, create a sales push to boost revenue, or focus on collecting aged receivable faster.  
FEI Daily: What are the long-term capital management strategies that financial executives should be considering?

Jackson: Creating long-term, sustainable strategies and processes for working capital is more important now than ever for financial executives, as pandemic impacts on businesses continue.  While managing working capital is more than just merely pushing back payments to vendors or collecting receivables faster, not all financial executives and their broader C-suite colleagues recognize the additional opportunities that can be executed internally and without much reliance on others, unlike pushing vendor payments or working to collect payments faster which demand other organizations’ involvement. There are several areas within the working capital processes that financial executives can focus on to help the business drive sustainable changes and secure future cash positions.  For example, within the order-to-cash cycle, companies can automate billing process with technology solutions, align sales and collection team compensation structures, and improve cash application processes to more efficiently apply payments to outstanding invoices.  There are also a number of areas within the procure-to-pay cycle that companies can look at, which could have a positive impact on cash, such as adjust payment methods (i.e. check vs. wire), changing payment frequency (i.e. weekly or biweekly), and requiring a purchase order match prior to starting the payment clock.

FEI Daily: How do financial executives prioritize among the various capital management strategies you described?

Jackson: Financial executives can often best prioritize capital management strategies by taking the time to understand each strategy’s total cash impact and ease of implementation.  To do that, financial and other executives should follow what data is suggesting, analyzing historical transaction level information (typically looking back 12-18 months) to determine where the biggest opportunities exist and calculate the impact of making improvements.  It’s also wise  to conduct a process maturity review across  underlying working capital components, comparing their performance against observed best practices within top performing companies as well as industry leading practices.  By reviewing the two data groups--working capital strategy prioritization and process maturity review-- together, financial executives will have visibility into where opportunities lie and the value of making changes.  Then, they can better assess which strategies are easiest and most optimal to put into practice.

FEI Daily: How can emerging technologies help with capital management across the short- and long-terms?

Jackson: Emerging technologies such as advanced analytics can save financial executives considerable time and provide valuable insights that may not otherwise be available when managing working capital and communicating progress to other C-suite leaders. For example, we often are told by financial executives that their companies don’t pay invoices early or before due dates.  Yet, when we run  advanced analytics around their detailed invoice data, payment due dates, and payment dates, we almost always find millions of dollars in early payments.  Advanced analytics can also help financial executives improve cash and working capital forecasting for their organizations, an area our recent poll found was the biggest working capital management challenge (31.8%) posed by COVID-19 disruption. Analytics and other technology can help organizations identify trends and issues throughout their order-to-cash, procure-to-pay, and forecast-to-fulfill working capital processes, which--when optimized--can have a significant impact on cash.