Survey: Companies focus on cash flow in wake of COVID-19

More companies are focused on working capital and overall liquidity in 2020 as they strive to position themselves in a post-COVID 19 economy, according to a survey from The Hackett Group, released Tuesday.

The researchers polled 1,000 large, nonfinancial companies across the United States for its annual "Working Capital Survey" and found that most firms slowed payments to suppliers in 2019 as they collected cash from customers more slowly and held slightly more inventory. The situation caused overall working capital performance to decline after several years of improvement, the researchers said. Cash on hand and debt grew dramatically, they added, reaching record levels.

The pandemic has forced companies to rethink strategies and sparked a dramatic focus on improving the situation, with many companies launching “comprehensive transformation efforts for the first time as they try to determine what their business will look like as the world economy emerges from the crisis,” according to the research.

Key findings include: 

• There is a potential for nearly $1.3 trillion of working capital improvement opportunities among the companies surveyed. Upper quartile companies converted cash three times faster than median performers. They collected from customers 19 days faster, paid suppliers 20 days slower, and held less than half the inventory. 

• Both debt and cash on hand increased by 12% in 2019, with cash on hand reaching the highest point in the last 10 years. Companies continued to take advantage of low interest rates, borrowing to improve their cash position.

Based on the results, researchers offer seven steps companies can take to improve working capital: 

1. Use disruption to drive change. Take advantage of the opportunity presented by the current liquidity challenges to assess, reprioritize, and make changes. Examine legacy processes to identify where improvements can generate quick wins.

2. Improve visibility. Ensure that the right key performance indicators are available for various business leaders, so that they can be used to drive action plans. Provide leaders with real-time, intelligent dashboards that equip them with the insight they need.

3. Look in-house first. Before making changes to terms with suppliers and customers, look for quick-win opportunities within the company, areas where process improvements can improve cash position. Promote a cash culture across the organization, and provide incentives for sales, procurement, commercial teams, and others to optimize for cash. On receivables, make sure staff are not trading terms for revenue, remove obstacles to payment such as mis-billing, and put clear escalation processes in place, up to and including having senior finance leaders call on overdue bills. Companies can also monitor customer payment performance, assess credit risk, and reprioritize activities by value. On payables, ensure that controls are in place to avoid early payments. Prepare for further disruptions, including an anticipated second wave of Covid-19. On inventory, encourage staff to consider cash impact when making decisions, collaborate cross-functionally to determine the organization’s appetite for risk and potential disruption, and develop effective contingency plans.

4. Focus on modeling and forecasting. Build the ability to do scenario modeling, integrated business planning, cash flow forecasting, risk assessments, and more to improve decision-making ability. Identify potential disruptors and refresh contingency plans as necessary.

5. Consider customers and suppliers. Monitor the financial health of customers and suppliers, and make accommodations where necessary, particularly in cases where losing a supplier might disrupt the company’s supply chain. Work with customers to provide incentives for payment. And optimize payment terms for suppliers, ensuring the right terms are being offered for each category of suppliers. Consider segmenting suppliers by risk and criticality to determine what approach to take, where to apply leverage, and where temporary support may be required.

6.  Accelerate technology adoption and digital transformation. Digital transformation, including smart automation, robotic process automation, analytics, and more can significantly improve efficiency and effectiveness, significantly reducing transactional work, standardizing and streamlining processes, and providing more insight.

7. Revisit service delivery models. Organizations need to increase flexibility, resilience, and agility to understand and manage risks across the supply chain and their impact on cash flow. Diversification, where possible, will help mitigate the risk of further shocks to the end-to-end supply chain. Companies need to look at corporate and functional strategies, internal processes, and organizational design to protect cash and build for the “next normal."

More information is available at The Hackett Group website.