Four steps from tactical liquidity protection to long-term viability
One of the central tasks of the CFO during a crisis is to ensure financial liquidity. A liquidity bottleneck can quickly threaten the existence of the company. Especially in times of crisis, a lot of extra measures are required in addition to operational cost and liquidity management. For this purpose, decentralized available information will be collected, aggregated and evaluated at great expense and under high pressure. The right measures and decisions must be taken immediately on this basis. The speed with which this is done can be success critical for the company's existence, as it is important to actively manage the solvency of the next 3-12 months and to remain capable of acting in the long term.
There are 4 essential steps to keep the financial effects of a crisis on the company as low as possible:
The diagnosis and recording of disorders is a complex process that has to be maintained throughout the course of the crisis. Up-to-date knowledge of the situation in the regions, with customers and suppliers is essential because changes occur, crises are mitigated or new trouble spots arise that require appropriate action.
In the event of a loss of sales, it is important to know when it affects liquidity and what other effects this loss would have. Are the materials for the order already in production or can they still be used for other purposes? The answer will have different effects on the liquidity and profit planning of the enterprise.
This applies equally to disruptions from the supply chain and production. If suppliers cannot keep their commitments or production lines are closed due to illness or quarantine, the effects on sales and customers must be quantified. On the basis of these effects and the original business plan, a cash-flow and profit plan covering several months can be prepared.
We have to keep an eye on instant measures - whether and to what extent they have an impact on the result. Short-time action not only reduces the personnel costs incurred, but also reduces production capacity, which may have a negative impact on the manufacturing of products for which there is still demand on the market. In order to be able to represent such trade-offs correctly, modelling is essential – especially on the financial key performance indicators.
"To simulate different effects and their impact makes it possible to mentally prepare worst-case scenarios and absolute instant measures."
What happens if a second lockdown occurs? What could a preventive restructuring framework look like? What happens in the event of potential insolvency? Does it make sense to sell off individual parts of the company to ensure the survival of the group?
Even if one hopes that such issues will not become relevant, theoretical preparation for the different ways out of the crisis is both meaningful and valuable.
In addition, models and scenarios provide convincing information about the likely cash flow and profit planning, which is valuable for investors and capital providers.
Once the first instant measures to secure liquidity in the short term and the ability to act have been initiated, a plan must be drawn up to keep results and liquidity under control in the medium to long term. To this end, the company's original strategic program should be compared with the disruptions and measures resulting from the crisis, initiatives have to be challenged and reprioritized. Does it still make sense to launch the new product on the market now? If the production of the product is shut down now, how can the capacities be used elsewhere?
The core issue is to find out which strategic issues are still relevant, which projects should be stopped, delayed or changed in their scope in order to build up a long-term cash-flow and profit planning.
Another important aspect is the permanent monitoring of the entire business environment. There are factors with potential impacts that are currently not in play but have the potential to influence our planning. The earlier these are identified as risks or opportunities and assessed in terms of their potential effects, the more reliable and the quicker their impact on liquidity and earnings can be controlled.
CFOs who coordinate diagnosis, malfunctions and measures, planning and monitoring of influencing factors and consistently evaluate their effects on sales, liquidity and earnings planning will ensure survival and long-term viability of the company.
To master these complex and error-prone tasks, CFOs should rely on good technical support. However, anyone who tries to solve them with the help of existing ERP systems may be not well advised, because ERP systems are only conditionally suitable for capturing effects in a crisis. Dealing with probabilities and risks is not one of their strengths, and they are often too slow for the speed required in a crisis.
Better alternatives are offered by systems that provide support throughout all phases of the crisis. They help to quickly collect disturbances and information globally, to condense the information, interpret the effects through simulation, to present action scenarios and thus ensure the efficiency and transparency of the entire crisis management that is so urgently needed.
Get through the crisis healthy and solvent.
Your Lars Witschel