• 1000

In the third of this series, we look at ways for companies to safeguard themselves against liquidity events and market downturns.

In the anticipation of a recession, KPMG’s global CEO Outlook 2022 survey suggests operational efficiency is amongst the top focus for CEOs to ride out the upcoming turbulence. Working capital becomes an increasingly important priority with leading companies consistently looking through a cash lens to support complex transformation and growth strategies – safeguarding them against liquidity events and market downturns.

Even in thriving times, ‘trapped cash’ often presents an opportunity for most corporations. Cash performance is a measure of business efficiency and effectiveness, and a cash culture goes a long way to driving a broader business effectiveness.

Working capital remains the cheapest form of capital and businesses are increasingly utilizing this form of funding to ensure their investment agenda remains intact. With many companies having working capital opportunities of between 10 -15% of gross working capital balances, freeing up cash from working capital may allow businesses to make acquisitions or capital investments, without the need to raise additional debt.

Using data-intensive analytics with targeted discussions in key areas, businesses will be able to identify and validate multiple opportunities to extract cash from their balance sheet. The way to look at working capital is to take deep dives at the transactional and process level across the entire cash cycle: purchase to pay, forecast to deliver, order to cash, and a holistic overview at strategy and other cash items that are often overlooked as well as controls.

Such cash items that often fall off the radar include making payments to suppliers earlier than the agreed terms, oversights in the provision of invoice to customers and the provision of invoice long after the goods and services have been supplied. There were also occurrences in which listed companies fail to raise more than 1,000 invoices for a major customer over a period of 12 months despite their systems showing approved delivery receipts. These incidents can be highlighted with intensive analytics enabling businesses to determine the cause and unravel them quickly.

Cash management is even more critical for distressed companies that have limited choices that need to preserve cash to buy time to restructure and/or refinance. Such issues may include:

  • In breach of or about to breach banking facilities and/or covenants
  • Struggling to meet short-term funding requirements and making unexpected requests for additional funding of your financiers
  • Withdrawal of supplier credit lines and/or trade insurance
  • Being forced to micro-manage cash/defer payments
  • Receiving more requests from customers to extend credit terms when cash is already tight
  • Forecasting covenant breaches which may require short-term liquidity management to avert
  • Many of these issues result from poor planning and visibility over how cash is being used in a business.

In these circumstances, there is a critical need to establish a cash focus in the business which can help the management to:

  • Improve visibility of funding requirements through the development and implementation of accurate cash flow forecasts both short (13 weeks) and longer-term (12 - 36 months)
  • Identify and implement short-term cash generation/preservation initiatives
  • Introduce tighter controls over cash related procedures
  • Introduce cash related KPIs
  • Improve communication with stakeholders especially key suppliers and financiers
  • Buy time to affect a long-term restructuring plan which typically involves the following activities:
  • Stabilize or improve cash/position/headroom within facilities
  • Manage a short-term or seasonal peak cash requirement or covenant issue

Times of crisis may tear businesses out of their comfort zone, forcing them to take drastic measures in the short to medium-term to ensure the company's liquidity, even more so for those that are distressed. Businesses can ride out the upcoming storm by positioning themselves better through cash and working capital management. These measures, however, must be systemized for the long-term and not to be abandoned after times of crisis.

By Guy Edwards, Executive Director – Restructuring Services, KPMG Deal Advisory