The initial coronavirus ‘crisis point’ is slowly ebbing away, but treasurers need to remain agile to secure operating cashflow and ensure liquidity for an extended time.
As the impacts of the pandemic began to tear through the global economy, treasury departments initiated ‘crisis mode’ with a focus on securing cash to their parent companies as quickly as possible. The goal was to secure cash to ride out the uncertainty caused by the pandemic.
Now many firms are transitioning towards a new status quo, emerging from into the second phase of pandemic management. As that happens, agility—and exceptional liquidity management—will be critical differentiators within the treasury.
While each firm has its own challenges, both external and internal risks remain fluid. The uncertainty requires finance and treasury departments to forecast on a very short term basis, as opposed to working only towards a quarterly and annual target.
As business activity dried up throughout the first five months of this year, liquidity plummeted – propped up by the government, capital markets, bank, and central bank intervention. In turn, US-based multinational companies reviewed their coronavirus-impacted cashflow forecasts, looking at changes in both supply/demand and payment terms.
In particular, many firms reviewed their supply chain financing programs to see where they could be expanded to increase liquidity.
As a result, many US companies have become risk-averse, pulling overseas liquidity back to the US and drawing down on their revolving lines of credit with relationship banks to ensure key operating needs had the cash they needed. For some companies, this included suspending dividends, reducing headcount and share buy-backs.
However, as businesses enter a “post-lockdown” economy, unlocking trapped cash and bringing it back to the US will benefit both cash flow and liquidity. While it can be daunting to take advantage of the current situation, treasurers can seek out different opportunities and changes. Investment policies need to adapt to how to sustain ongoing short-term liquidity needs coupled with low-interest rates, which are expected to continue for the near term.
From 2009 – 2019, US companies borrowed $9.3trn in corporate loans, but coronavirus has pushed multinationals like Hilton and the Walt Disney Company to draw down some of their revolving credit loans as buffer material.
In April, the US Chamber of Commerce found that a majority of Paycheck Protection Program recipients planned to use funds for immediate cash flow needs. In early May, US banking regulators also relaxed banks’ liquidity requirements to support their access to emergency federal loans.
All of these measures should trickle into the rest of the economy and boost cashflow throughout different sectors, giving treasurers more options. Across the pond, the British Chamber of Commerce reported that 62 percent of businesses only have enough cash reserves to last three months or less, highlighting a need for treasurers to take a creative approach.
To remain as agile as possible, treasury departments should re-evaluate their investment policy, capital structure, and revolving lines of credit during scenario planning. Some departments may find it helpful to go ‘back to the basics’ and see exactly what the organisation needs to survive, then take that knowledge into their revised financial planning. Tactically, many are driving increased cash buffers by driving more cash out of efficient DPO and DSO initiatives such as giving more substantial discounts for early collections and pushing out vendor payments. Related to this, financial supply chain programmes have seen an exponential increase in interest since the crisis started.
As the pandemic subsides, cash will continue to remain king, but firms will enter a period of optimal cash – and at that point, treasurers will start to look to how best to use it. This will be the next phase of the challenge, and it will be far from straightforward, but treasurers can prepare for it by scenario planning regularly while conducting involved risk assessments.
Treasurer will also need to continue to unlock trapped cash by reviewing banking relationships, weighing up changing counterparty risks, and pivoting cash strategies with a fluid approach to business management. Bank relationships will be as crucial in this next phase as they have been over the past few months.
Recently, many organisations have reverted to a back to basics approach in how they view their supply chains, and how they deal in their own unique markets. However, their treasurers have had to get creative and reactive, and that is unlikely to change.
The concept of agile finance emerged a few years ago, and it has come to be the very definition of how a firm operates. As the challenges to organisations shift in the coming months, the reliance on an agile approach is likely to become even more imperative for recovery.