With the global economy still reeling from aftermath of Covid-19, organizations are under more pressure than ever before to mitigate the effects of adverse economic conditions. Standard recession contingency plans are no longer going to cut it; finance departments should be looking for ways to go above and beyond in their cash flow efforts if they want to ride out the current climate and protect their company’s margins.
In the latest whitepaper from The Hackett Group, we discover that the majority of selling, general and administrative (SG&A) organizations do not expect the economy to recover by the end of 2021. So what can be done?
The first major area finance departments should look at is cash preservation. By first focusing on the cash currently within – or owed to – the business, finance teams can take steps to improve working capital, tighten cash management policies and minimize idle cash, all of which are cheaper and quicker measures to optimize cash flow than immediately looking at cutting costs.
If you’re planning to take steps to preserve cash, there are four key areas which you should prioritize.
1. Enterprise-level decision support
Take your magnifying glass all the way to the top! By surveying the monetary value of underutilized assets, revisiting pricing and revenue models, and evaluating the company’s capital structure, you can start paving the way for top-down cash preservation.
Intelligent customer segmentation is your friend here – by dividing your customer base into groups based on size, risk class, or strategic value of accounts, you can target each segment with a tailored cash collection plan. Other improvements you can make here could be to engage sales teams in cash collection, expedite the billing process, and optimize customer dispute resolution
Now’s the time to chase up your suppliers for any inaccurate payments and unclaimed credit balances. Segmentation can also work here; by segmenting your suppliers by payment terms your team can prioritize scheduled payments according to urgency or length of payment cycle.
Finally, you can look closely at your treasury to gain an understanding of sources of incoming cash and deposit frequency, evaluate your bank account structure, investigate sources where additional cash may be found, and aligning your cash management to your operational structure.
Cash preservation is the first step you should take when looking to optimize cash flow. In Part 2 of this blog series, we’ll be looking at ways in which you can reduce cost. For a more in-depth checklist of action items, download the latest Hackett Group whitepaper “46 Ways to Preserve Cash and Reduce Cost”.