Pandemic forces CFOs to manage financial liquidity better

Accounting

CFOs and other finance executives are finding they need to reforecast their company’s liquidity and cash flow on a weekly and even daily basis as they cope with the pandemic.

While weekly or monthly forecasting seems to be the norm right now, many CFOs are wondering about the right frequency for forecasting during the COVID-19 pandemic. According to an online poll during a webcast last October by Deloitte, 8.2 percent of the respondents said they are reforecasting every other week, while 11.5 percent are forecasting daily. Nearly a third (31.4 percent) of respondents are updating their cash flow and liquidity management plans monthly, and nearly a quarter (24.5 percent) are updating their plans on a weekly basis. Only 7.2 percent of respondents said they’re not making changes to their cash flow and liquidity management plans.

The pandemic has prompted many companies to pay extra attention to their cash flow and liquidity level as supply chains are disrupted and customers flock more to online services for shopping and other needs. Finance executives need to be closely attuned to how much cash their companies have on hand and are relying ever more on technology that can be adjusted based on the latest reports.

Kobi Wolf/Bloomberg

The survey respondents said that forecasting was either their top challenge (13.8 percent) or among their top challenges (54 percent) with liquidity and cash management during the pandemic. “A high percentage said forecasting was either their top challenge or one of their top challenges around COVID,” said Anthony Jackson, a principal at Deloitte Transactions and Business Analytics LLP. “That wasn’t surprising necessarily, but what was interesting was how widely it has impacted businesses. We work with companies that are often focused on cash forecasting and trying to improve it and understanding what liquidity will look like. As you can imagine, that’s gotten a lot more important to a lot of companies through everything that happened with COVID.”

Only 13.5 percent of the survey respondents said they are currently using technology for working capital management, while 18.8 percent of respondents plan to implement related solutions in the next 12 months. “When we asked them the question, about 13 or 14 percent said they were using some sort of advanced technology and about another 20 percent said they were planning on it, so that left about half that were not. That was maybe a little surprising to me just because I think there’s definitely an opportunity to do some of the forecasting better than maybe what they’re currently doing. One of the ways to do that is through some of the different analytics and technology solutions that are out there now.”

Deloitte has a tool called Precision Tool that allows companies to use different data sources to understand how those tie into their performance. “One of the key learnings that COVID has had on businesses is how it has changed how companies can look at building their forecast,” said Jackson. “The typical drivers of some of these forecast models would usually be to look at what we did last year, increase that by 10 percent or 15 percent, and that will be our revenue forecast going forward. When something like this occurs, those techniques don’t work anymore. What you have to do is you have to be able to go deeper and understand how your business connects to external drivers, things like GDP and broader economic trends.”

Despite all the challenges, 84.6 percent of the executives surveyed said they feel confident in their organizations’ abilities to manage cash and liquidity. “Pre-COVID, very few companies were really focused on liquidity and what their runway looks like and how much cash they might have on a weekly or monthly basis,” said Jackson. “Most companies were focused on forecasting out a P&L and an income statement. They focused on EBITDA and earnings, but that shifted pretty dramatically with COVID. Liquidity took a front seat for a while. One of the things I hope companies will do — whether it’s their CFOs, accountants, controllers or treasurers — is learn from some of the steps that they’ve taken and some of the things that they’ve done to get better insights into liquidity and to carry some of those things over as we get out of this current COVID situation, hopefully relatively soon. Take the learnings from that and use them to run the business in a better way to help make strategic decisions on how they’re performing and where they might be able to invest, and find areas they might need to fix or clean up.”

He believes companies should be doing weekly projections of their liquidity and cash flow. “We would recommend weekly as the right timeline to focus on forecasting cash, basically building out a 13-week forecast,” said Jackson. “Look at one quarter to see how you’re performing and what the cash looks like. It gives you the opportunity to take necessary actions and make corrective decisions for understanding how performance might be over that time period. It was interesting to me that only 25 percent were doing it weekly. We’ve done this for a very long time for a number of companies and have found that weekly is the most effective timing to build out and be thinking about cash forecasting.”

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