Liquidity scenario planning: Projecting cash flow

April 27, 2020

Authored by RSM Canada LLP

Joe Reilly, CPA, CA, CBV shared this article

Surviving in the short term and thriving long-term


For many businesses, surviving the COVID-19 economic downturn depends on managing liquidity and, more specifically, managing enterprise cash. The erratic timing and extent of various disruptions caused by the COVID pandemic may reduce cash on hand, threaten future cash flows and curtail the ability of a business to meet immediate obligations. Uncertainty over the ability to pay employees and creditors, to withstand supply chain shocks and to maintain other important operational functions, highlights the importance of liquidity scenario planning to business sustainability. 

In order to effectively manage through the crisis brought on by the pandemic, an organization facing liquidity issues must perform a detailed analysis of direct cash flow projections, assess the impact on net working capital and inventory management, and further, extend management decision-making through the associated tax incentives. The goal is to quickly create an action plan that enables the business to continue operations in the near-term, and, as the crisis wanes, to eventually get back to business as usual. 

“This is probably the most difficult exercise to go through because there are so many variables and unknowns,” says Joe Decilveo, an RSM partner who specializes in financial consulting services. “But what needs to be done is to work with the best information you have at the moment.”

Forming the team

The first step organizations should take is to form a crisis liquidity team, Decilveo says. It should consist of company executives and may include outside advisors. The team should be supported by personnel who can provide relevant information in a comprehensive range of areas, including operations, procurement, service or production delivery, distribution, sales, technology and human resources, focusing squarely on how each component affects the business’ cash position.

Aggregating data that helps track daily, weekly and monthly cash flow activities is also critical to the process. Organizing that information in an easily consumable dashboard format for executives enables effective decision-making. 

“Estimating how long this is going to last, that’s a crystal ball question—nobody knows,” states Loretta Keyes, director of consulting services at RSM. “But organizations need to be able to look at it 30, 60 days out from now, 90 days out from now with enough specificity to make critical operating decisions.”

Managing a workforce through a pandemic with no clear time frame presents another challenge. Deciding to permanently reduce staff could hinder a business’ ability to restore its capacity after the crisis, while simply furloughing employees could enable greater mobility.

“Making short-term decisions can sometimes lead you to a very satisfying near-term answer, but you may have forsaken long-term opportunities,” Decilveo said. “Short-term decisions that allow you more options in the long term are those that should be pursued.”

Managing relationships and inventory

As the liquidity crisis team collects data, it’s critical to understand what cash the company expects to receive in the near-term. Recognizing that the business’ customers and vendors are also facing similar uncertainties, the company has to work with those parties and with creditors to come to favorable terms for all. 

The liquidity crisis team should review the company’s inventory management strategy and determine if there is a way to reduce costs. Certain businesses are able to adapt an inventory or manufacturing system in which inventory is not stockpiled but rather obtained from suppliers on an as-needed basis. Adopting such an approach, assuming a supplier can ensure delivery on time, may save significant costs related to the purchase of materials and storage.

When developing the cash flow dashboard, a company should make sure the projected receipts and disbursements are realistic and achievable. If the assumptions to cash flow are not realistic, the projection will be of no use. A conservative approach is best.

Once the projection model is up and running, Decilveo has another recommendation: “Reevaluate, reevaluate and reevaluate,” he advises. “Perhaps decisions made on Monday will not be the decisions you continue to go forward with on Friday or the next week. Continual iteration of reevaluating initial steps, rethinking, and then rebuilding cash flows from those, is important.”

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