ICAEW.com works better with JavaScript enabled.

Data analytics community

Cash is king - don't let the liquidity crunch kill you business during COVID-19

Author: Mohit Daswani, CFO of ThoughtSpot

Published: 14 May 2020

Europe’s top 1000 non-financial companies have €353 billion in accounts receivable outstanding at any given point in time (Source: FactSet). That amount is roughly the same as Denmark’s GDP! The ability to carefully manage working capital is critical during a crisis like COVID-19, when cash - that most liquid of assets - is king.

Companies often underestimate the role of working capital management as a lever to free up cash from inventory, accounts receivable, and accounts payable. Many default to ‘squeeze’ tactics, like demanding heavy discounts from and delaying payments to weaker suppliers. These, however, are short-sighted. They can lead to higher costs down the road from financial penalties, legal costs, and irreparable damage to reputations and brands. They also inflict immense damage on business relationships and the wider economy.

In addition to avoiding all the negative consequences of squeeze tactics, companies that manage working capital well have higher than average financial flexibility, value and productivity. They rely less than others on outside funding and have more cash to invest in things like R&D, recruitment, staff training and benefits, and acquisitions.

In the midst of a crisis, improving working capital management might not seem like ‘low-hanging fruit’. Most companies want to do a better job but have historically struggled to get insights fast enough, and with enough granularity, to understand the root causes of problems and how to solve them.

A large, global tech distributor’s case study

Making even small, incremental improvements to working capital management can free up a surprising amount of cash. To illustrate, take the example of one of the world’s largest technology distributors, which was asking questions such as the following in order to gain greater visibility of granular details:

  • What are the receivables days by region? Are they on plan?
  • Which customers are taking longer than agreed to pay?
  • Where do we have aged unbilled inventory?
  • Which are the top 10 sales reps by unbilled inventory balance?
  • Which staff members are slow to enter timesheets?
  • Where are poor payment terms slowing us down?
  • Which customer accounts are in dispute?

Using our ThoughtSpot analytics software, the finance team was able to spot trends and also unearth detailed data buried in its financial systems. Rather than having to extract data from native sources, set up complex pivot tables in Excel and do manual analysis, team members are now able to surface answers themselves to questions like those above in near real-time. Analytics speed really matters during a crisis when every wasted second corresponds to the opportunity cost of reduced cash flow.

Through this system, ThoughtSpot is helping this tech giant reduce its working capital days. For the company, an accounts receivable day is worth $54 million and its Weighted Average Cost of Capital (WACC) is at 8 percent. This means that the impact of cutting one day is $4.3 million. Over 12 months the team has already shaved four days off, freeing up $17.2 million in cash flow.

Group treasurers are well-positioned to drive change

Group treasurers are in strong position to act as the driving force behind this change. They can explain the business benefits, devise meaningful performance measures and work with other teams across the business to achieve results.

For example, if freeing up working capital from inventory is a goal, a treasury team would collaborate with the operations team to examine metrics like Days in Inventory (how long inventory is tied up for, rather than just how much) and the real cost of inventory including storage, handling, insurance, wastage, damage, opportunity cost – all of which can add up to 25 percent more to inventory costs.

Arming treasury teams with information

Whatever your company’s strategy is to free up working capital, the one thing you and your treasury team members need at the ready is current, reliable business data. The right system will help teams quickly assess things during COVID-19 such as the impact of government funding schemes, liquidity positions and how the deferral of VAT payments will impact cash flow forecasts. Here is what to look for in an analytics system to support efforts to manage working capital:

  • Provides a very granular view of data, right down to invoice-level detail.
  • Systems that offer personalisation can deliver data insights to different users depending on their role and preferences. For example, operations people often need to look at inventory details at a very granular level, whereas a CFO would want to look at aggregated data to look at metrics such as Inventory Turns.
  • Intuitive and easy for treasury teams to get up and running with and use themselves with little or no training. This is particularly important in the midst of an ongoing crisis like COVID-19. Look for systems that use a simple, familiar interface such as search, and can be queried using natural language.
  • Uses AI to spot trends and also outliers in large volumes of data. For example, a system that can detect outliers would be able to identify if there was a pricing error on an invoice.

In such a far-reaching crisis as COVID-19, it can be hard to think about adding another project to our agendas. However, when it comes to working capital management, the size of the prize is too great to ignore. When we eventually rebound from this crisis - and we will - it will be the companies that are healthiest and most resilient that are best placed to seize the new and unexpected opportunities that emerge.

I recently hosted a webinar on working capital management with Jeff Noto, SVP Business Analytics at Verizon, the US telco, which you can watch on-demand. For more information or a general chat, drop me an email.