Cash flow forecasting in a rapid-change era

Since the start of the pandemic, cash flow forecasting has gone from being challenging to nearly impossible.  

Historical cash flow trends have gone out the window, and for most companies, the dramatic change in revenues and costs couldn’t be imagined. Many retailers, for example, moved into virtually unchartered ecommerce territory. Even the likes of Amazon and Walmart couldn’t anticipate the rapid change in buying patterns and the potential growth in sales that would lie ahead. By the end of 2020, online shopping in the United States increased by 44%, to $861.02 billion, the highest annual ecommerce growth in two decades. Online sales now account for 21.3% of total retail sales. 

In one year, Amazon’s online retail sales grew 37.6% from $280.52 billion in 2019 to $386.06 billion in 2020. This compares to a year-over-year increase between 2018 and 2019 of 20%. 

Walmart also showed an unexpected revenue boom as shoppers moved from their bricks and mortar stores to online channels. In 2019, the retail giant’s sales grew by 1.8% over 2018, and in 2020, by 6.7%.

Similarly, companies operating in the healthcare market couldn’t foresee the change in cash flow that was about to come. For Tente Casters North America, the U.S. division of a manufacturing conglomerate headquartered in Germany, medical supply sales skyrocketed,  operating costs were changing in real time, and input pricing for materials was uncertain. In just four weeks over March 2020, order intake in their medical products vertical increased by an 252% — an amount they couldn’t have predicted.  

“We had to rearrange production lines to focus on medical products to keep up with demand, add head count and reach out to different sources of supply for component parts, even if it meant at a higher cost, CFO Pierce Kohls told CFO Dive. “Forecasts of inflows and outflows would change by the month.” 

In other companies, like Midwest Industrial Supply, sudden swings in commodity and input prices during COVID would test even their most sophisticated forecasting models to the max.  

Midwest is a privately owned U.S.-based company providing de-icing, erosion and soil stabilization services to mining, construction, mass transit and other heavy industries. At the best of times, forecasting revenues beyond a three-month horizon was a challenge. “To a large degree, demand for our services depends on things like commodity prices and raw-materials demand,” CFO Mark Schoolcraft said. 

Midwest uses different forecasting methods for each business unit, combining historical data and linear regression models with predictive analytics. However, “the forecasting challenge with COVID,” Schoolcraft says, “is that it comes with effects that history won't tell us.”

Missing the mark

All this volatility is the enemy of accurate cash flow forecasting and effectively managing working capital, says Dr. Howard Johnson, managing director at Duff & Phelps, a Kroll business. “For example, if you get your sales and expected receivables wrong, this impacts your cash conversion cycle, which has a lot of secondary implications,” he said. “During COVID, customers [haven’t been] paying as quickly because they’re experiencing their own cash flow problems. So, we’ve seen a lot of cases where working capital has expanded at a faster rate than revenues, and this causes a cash flow crunch, particularly for growing businesses.”  

In an example Johnson provided, if sales are escalating at 20%, but because customers are taking longer to pay, receivables might be expanding at 30%, which will drain cash. As a result, “companies have to be very proactive with their lending institutions in order to ensure they have adequate debt capacity to facilitate their rolling working capital requirements.”

Inaccurate cash flow forecasts aren’t just an operational problem; they can hinder the sale of the business. 

Valuation trouble

If companies aren’t getting the cash flow forecast right, their ability to put a value on the company if they’re preparing to sell the business is made more difficult, Johnson says. “If budgets and forecasts are not achieved because of volatility, it has a downward influence on valuations because credibility is shot,” he says. 

So, how can CFOs improve their cash flow forecasts under high volatility?  

“The first rule about forecasts is that, you know they're going to be wrong,” says Johnson. But a properly done forecast, which includes meaningful sensitivity analyses, can go a long way to getting closer to the mark.  

“It’s well worth the time and effort for CFOs to develop a very comprehensive cash flow model for their organizations,” he says. “I think it's important to forecast cash flows by estimated revenue by product, by customer, by currency, and by breaking down operating costs between fixed and variable and other categories. If there are certain variables, like key input prices that could fluctuate dramatically, having a proper sensitivity analysis can help.”

Even though the forecast might not be perfect, it helps the CFO with the company’s lending partners. 

The other benefit of that approach is that the CFO can extract some highlights and present them to his or her colleagues and that can be a very effective tool for getting everyone thinking about the importance of cash flow monitoring. 

“At the end of the day, adding more detail to the cash flow forecast can help executives manage the type of volatility we’ve seen over the past two years and makes the CFOs job a bit easier,” Johnson says. 

When the pandemic hit, marketing and sales software company HubSpot made a strategic decision it couldn't have made without confidence in its cash flow forecast. It extended payment terms and advanced commissions to help its partners make it through the downturn.

"They knew their partner community was going to get hit hard from a cash flow point of view," Ron Gill, former CFO of NetSuite, said in a webcast. "They came out of the other side with a much healthier community."

Confidence in its cash flow forecast was core to HubSpot's decision, because without it, it couldn't have known the impact on its own fortunes of giving its partners a break. 

"Because they had their hands around it, they could estimate the impact of this and forecast how it would work," Gill said. "So, having confidence in your forecast can be strategic."

Business health

Cash flow forecasting isn't typically seen as a strategic tool. At its most basic, it's about leadership knowing whether the company has enough money to keep running. Can it meet its payroll and pay the bills? Once basic needs are met, knowing the company's true cash position can support higher-level decisions, like whether the company should raise capital. "Do we need to raise? When should we raise?" said Gill. 

Because of the importance of an accurate cash picture, CFOs and treasurers typically rely, at least informally, on what's known as direct cash flow forecasting. That's a bottom's up approach that pairs real-time data from all of the company's bank accounts with its biggest cash flow items — generally its submodel accounts including payroll, accounts payable (AP), taxes, leases, accounts receivable (AR), or collections, and equity payouts. 

"If you can capture 80% of these cash flows, you'll be forecasting better than most, so figure out what these biggest cash flow items are," said Paul Smithwood, director of data and AI at Bank of America.

Capturing that cash flow is easier said than done. The challenge is getting cash data from all sources on as close to a real-time basis as possible. 

Key to resolving the challenge is forming strong interpersonal connections with what Stefanie Layne, director of treasury at Unity Technologies, calls the "Knows" — the people in each business area who know the sources, and the status, of the cash they generate or spend.  

"Early on I meet with the Knows," she said.  

In the typical three-month reporting cycle, she'll meet with these ground-level staff at the beginning of the first month, then the second month, then more regularly in the third month and then daily in the last week of the quarter.

"If your AP team is trying to extend terms, and purposely extending days payable outstanding (DPOs) from, say, 30 to 45 days, you must understand that because it dramatically changes your cash out the door," Layne said.

"Same with days sales outstanding (DSOs)," she said. "Is the selling philosophy changing? Maybe they're starting to do more long-term contracts or prepaying, so all those impact AR balances and DSOs. [You want to] partner with teams that are being measured by these numbers, how they're changing their business processes."

Then she meets with the CFO and the head of financial planning and analysis (FP&A), who's responsible for the official, external-facing forecast.

"Month one and two is more of a sanity check and sharing of ideas and learnings," she said. The goal is to know if actual cash is diverging from the forecast and, if so, why. 

"If you budgeted $15 million for bonuses, and I only put in $10 million, how did you get your number?" she said. "So, it's a benefit to meet in months one and two."

By the time the last week of the quarter rolls around, the level of detail is so granular that the treasury head can then get the CFO or other key person to step in as needed to get cash in, or out, to reconcile the forecast with actuals.

"I can say, ‘Here's how we're trending,'" she said. "It looks like we need to push some AP out the door. Or it looks like we need to call some of these big customers, collect a little bit more money. So, having that real-time pulse, and setting expectations of the CFO [is important]. Having them help drive the final results is priceless." 

Internal tracking

Real-time monitoring of actual cash coming in and going out is done on an informal, or at least internal, basis to help the finance and accounting teams have as true a picture of cash as possible, but it's the more formal, indirect method that companies use in the reporting that they release externally. 

Deriving cash projections formally is considered more of an accounting exercise — a quarterly or annual reconciliation of net income to cash. 

"The indirect cash flow statement is useless as a business tool," said Gill, "which is why most businesses just consume the burn, the number at the end. There's an irony that we all use this statement that's somewhat useless to the business."

The direct method, on the other hand, serves as a tool because finance staff can create a forecast that executives can understand and is actionable. 

"If I forecasted we're going to pay $10 million to employees and we pay $9 million or $11 million, that's a variance everybody can immediately [appreciate] and immediately start to drill down into why," Gill said, "and learn why we missed it in our forecast. You iterate that way and get better and better. It makes more sense as a business tool."

There's always a divergence between projected and actual cash flow. Some partners are late paying their bill, or payroll increases because of new hires. At the end of the period, actuals of both the direct and the indirect must match up. But in the interim, the direct method produces the kind of forecast that decisions can be made against, the specialists said.  

How you manage your cash flow can have a big multiplier effect on your company valuation but most finance tools are not optimizing for that, Jeff Epstein, former CFO of software giant Oracle, said in a webcast.

“If you can improve your cash flow by $1 million, fundamentally, it means you’re really saving at least $3 million and probably $10 million in terms of valuation of the company,” said Epstein, now operating partner with Bessemer Venture Partners. “Incredible leverage.”

Despite its importance, cash flow often gets short shrift in finance systems. 

“Most company tools are focused on GAAP accounting and not on cash flow,” he said.  “And yet when you ask companies what they’re thinking about in terms of capital structure, it’s, ‘Well, when do I need to raise my next round of cash if I’m losing money and l’m backed by venture capital or I’m private equity backed?'”

Even with public companies, which tend to focus on earnings rather than cash flow, investors can appreciate the impact of cash flow improvements on company fortunes, he said. 

“The sophisticated public company investor also thinks in terms of an internal rate of return (IRR) and how to get a good cash-on-cash return,” he said. “In addition to all the normal systems you have, if you can also have a system of processes and tools to focus on cash flow, and you can save $3 or $10 for every $1 you save in cash flow, that’s really important.”

Two years of runway

Getting a handle on cash was particularly important last year when the coronavirus hit as companies looked to their CFOs to come up with at least two years of runway to help them survive the uncertainty. 

“For organizations that didn’t have a centralized way to look at that information, it became a mad scramble,” said Gopal Ramanathan, senior finance director at Icertis, a contract management software company. “They had to piece together different contracts, different types of information.”

Tracking that information is easier now that companies no longer rely solely on spreadsheets, but how you set up your tools is crucial, said Ramanathan. 

After he brought in a software system to help his team improve collections at the outset of the pandemic, he learned he could get more value by using it to improve coordination between collections, sales and finance.

“We used a feature to tag a lot of qualitative information that doesn’t typically associate purely with collections,” he said. “That helped sales reps understand what was happening with their customers.”

One tag might indicate that the collections team had already made three calls to a customer. By giving sales reps access to that kind of information, they could let collections know of any sensitivities that would make an additional collections call unproductive.

“That gave them the ability to tag their customers and let collections know sales reps do not want you to reach out to the customer,” he said. 

Prior to having the new tool, teams were relying on customer relationship management systems, which wasn’t optimal from a cash management perspective.

“CRM is there to help teams attract deals and successfully deliver on them,” he said. “But a finance team that’s interested in cash flow forecasting has a different mandate, so having a dedicated tool that also gives them the ability to pass that relevant information to the sales rep really worked, because even from an integration standpoint, we were able to pull information from Salesforce, provide that real-time to collectors and they in return took that information and sent it back to our sales teams.”

Slow incoming cash

There are many reasons customers aren’t paying their bills or are systematically paying them late, which throws off forecasts and reduces cash to the company, and you need upfront visibility into these reasons if you’re going to fix the problems, Epstein said. 

“It could be that the customer signed up and never had any money,” he said. “Your sales people are wasting their time and sales commissions signing up customers who would have never paid. It could be they could pay you at first but then they ran into trouble.”

Other companies actually build in late payments because of the interplay between when their revenue comes in and when their vendor bills come due.

“They say they’re going to pay you in 30 days but, if you’re an advertising agency and you fund your business on the float between when you get paid by your clients and when you pay your vendors, you’re intentionally paying slowly because that’s how you built your business,” he said

In many cases, late payments simply stem from bad management.

“They could just be disorganized,” he said. “They want to pay timely but they can’t find the bill or they sent the bill to the wrong place.”

The problem could be on your side as well, he said, if you have bad information on your customer or they no longer think they’re getting value from you. 

“You could have a product problem,” he said. “They want you to fix the problem and this is one way of getting your attention, or they don’t like the product anymore and plan on canceling anyway.”

Regardless of the reason, the cash management system should be able to flag these problems upfront so the finance team can intervene with solutions, he said.  

Leadership visibility

More broadly, cash management involves internal decision-making as well; company leadership, including business function heads, must know the impact their actions have on cash flow if the CFO hopes to manage that impact better. And that starts with visibility. 

“Cash flow in a sense tends to be looked at as a finance metric,” said Ramanathan. “A big goal of every finance leader is to make sure when they speak the language of cash, they also make sure the business leaders can follow that and see how the decisions they’re making impact those outcomes.”

“[The CFO] can make sure we know all of the things coming into and out of the business and the best way to manage through that,” said Hope Cochran, former CFO of King, the maker of the Candy Crush game app. “That’s an important role that gets lost a little bit. People think we’re just there to take in what’s happening and record it and produce a report. There’s another step: the CFO translates that report, goals and the actions to get there.”

When WeWork was preparing for a bond issue in 2018, underwriters were raising concerns over its leverage. The company’s response wasn’t to reduce leverage by adding equity or lowering debt but by adjusting EBITDA until it got the ratio it wanted.

“We all know how that story ended,” Andrew Holmes, a Moody’s Analytics director, said in a Moody's Analytics webcast.

By turning its $193 million loss in earnings before interest, taxes, depreciation and amortization (EBITDA) in 2017 into a positive $233 million in what it called community-adjusted EBITDA, it erased its leverage problem without having to make any changes to its planned bond offering. 

“People didn't believe in community-adjusted EBITDA,” he said, but that didn’t stop them from investing in the company.

It was one instance in which the company adjusted EBITDA to meet its short-term needs while masking a longer-term leverage problem that came to a head in 2019, when it had to pull its IPO because of valuation concerns. 

Extreme case

Holmes called the WeWork saga a cautionary tale of misusing EBITDA, a metric that can provide a good measure of company performance over time and that’s useful for setting valuations, but is too often seen as a proxy for cash flow or, in some cases, profitability. 

It’s neither of those things, which is why EBITDA often increases while cash and profits decrease, and vice versa, depending on market conditions.  

But because so many people use it, it’s important for accounting professionals to calculate it thoughtfully and consistently. “You want to be clear what it is,” Holmes said.

Non-GAAP measure

Accounting organizations are unlikely to treat EBITDA and its adjustments in a standardized way anytime soon.

That’s because the metric, created by investment bankers to show growth promise, isn’t recognized under Generally Accepted Accounting Standards (GAAP) in the U.S. or International Financial Reporting Standards (IFRS) elsewhere. 

Given the lack of standardization, organizations should do their own EBITDA calculation if they’re trying to raise credit capital and the lender looks at the measure in calculating leverage.

“If you think someone’s going to calculate your EBITDA, you should do your own” and offer that number, he said.  

In WeWork’s case, it changed a negative to a positive by first calculating adjusted EBITDA by making relatively common adjustments, including to depreciation and amortization. WeWork then calculated what it called Adjusted EBITDA Before Growth Investments by adding back in costs that are typically excluded, such as those for sales and marketing and new market development.

It justified the adjustments on the grounds that, once new office buildings came on line, they would generate revenue without the company having to pay those expenses anew.  

“So, add those back in,” Holmes said.  

It then made a subsequent adjustment — its Community Adjusted EBITDA — by adding back in general and administrative (G&A) expenses. It was “a new animal, never before seen in the wild,” he said.

Cash flow differences

Free cash flow (FCF) is another widely varying metric that lacks standardization but, like EBITDA, lenders commonly use it in underwriting loans. For that reason, if you’re seeking to raise credit capital from a lender that calculates payments based on it, you want to do your own calculation so you know what you’re facing.

“Look at that and not EBITDA,” he said.  

In general, FCF is the cash available to service lenders and shareholders and do things like acquisitions after the company has incurred expenditures that are effectively mandatory.

You can think of it as adjusted EBITDA but without interest, working capital changes, capital expenses, and some other line items, he said. 

Some organizations also exclude dividends, which Moody’s recommends.  

That’s because companies typically treat dividends, though discretionary, as mandatory. 

“Kellogg's has paid a regular and rising dividend for decades,” he said. “If the chief executive of Kellogg's were to cut the dividend, would that impact his job prospects? You bet it would. Has he borrowed money in the past to pay his dividends? Yes, he has.”

Private companies also treat dividends as mandatory, Holmes said. 

EBITDA vs. FCF

Although EBITDA and FCF measure very different things and can move in opposite directions depending on companies' responses to changing market conditions, accounting teams should be prepared to do their own calculations when trying to raise credit capital.

“If you expect it to be repaid by cash flow, know how it's calculated,” he said. “Know how cash flow varies from sector to sector, and through the cycle.” 

Bottom line, both EBITDA and FCF, despite their lack of standardization, are useful measures, he said, but be thoughtful in using them.

Given how important managing cash is to companies, it’s surprisingly hard to get visibility into one's cash position,  and also to know when a cash crunch is looming, a treasury consultant said in a webinar.

Particularly for companies with operations in multiple states or countries, just getting a handle on your cash balance isn’t easy because of time and other constraints, Kenneth Fick, director of strategy and transformation for MorganFranklin Consulting, said. 

A surprising number of companies don’t use any kind of treasury management system (TMS) to manage their cash, which means the treasurer or a finance analyst has to manually log into each bank portal, access the accounts, and download a CVS or other type of file to input data into a consolidating master spreadsheet, typically in Excel, to come up with the company’s position, a process that can eat up a lot of time and also introduce manual keying errors. 

“Simply knowing what cash you have at the beginning of the day generally can take anywhere from two to six hours, so you’re spending half your day on a Monday, Tuesday or Wednesday just trying to figure out what cash you have,” he said. 

One company he’s working with hasn’t been able to get any visibility into the cash it has through a subsidiary in India, creating what he calls a cash “black hole” in its corporate-level accounting. “They know [the accounts] exist,” he said. “What cash is there? Can it be repatriated? Is it just sitting in a non-interest-bearing account? They just can’t access it.”

That company's black-hole situation is unique. For more everyday situations, Fick recommended using a treasury management system because it gives you a way to consolidate your accounts into a single application. Most of the systems are on SaaS-based platforms.  

“What they do is minimize these efficiency challenges and provide connectivity directly to the banks,” he said. 

Signs point to problems

Fick walked through five early warning signs your cash flow is in trouble.

1. Not having a quarterly cash forecast

Companies that haven’t created a model for forecasting cash that's separate from the other modeling your financial planning and analysis (FP&A) team does are setting themselves up for problems, he said. 

“A lot of time your FP&A team models your balance sheet, P&L, and financial statement over 12, 18, and 24 months for planning, but they fail to take it the next step in regards to the cash component,” he said. “They don’t see [where cash is] at 13 weeks. There’s nothing magical about that. It’s just one quarter out, but it gives you that visibility in the short- to intermediate-term regarding what will come in and go out based on your assumptions in your model.”

2. Not knowing your cash break-even point

The break-even point is the amount of cash you need on a monthly basis to meet your expenses based on your monthly revenue, and if you don’t have a handle on this, you risk coming up short at crucial times. 

“If my revenue is $250,000, I know that, in order to make payroll and other expenses, generally, on average, I need about $150,000 to $180,000 in cash per month,” he said. “So, I know if it goes below that, I have to get it from somewhere: a line of credit, cash on hand, whatever. What if you’re a seasonal business? If you sell Christmas ornaments, you get a gigantic windfall in the fourth quarter and you’re cash-flow negative throughout the rest of the year. So you have to understand where that break-even point is.”

Fick said you should take it as an ominous sign if your company resorts to discounting just to get money in the door to meet your monthly expenses. “ A lot of times I’m seeing, ‘Well, I have all this accounts receivable, but I don’t have enough cash.’ If you’re starting to discount because of the cash impact to get revenue in the door, that’s a big warning sign.”

3. Use of long-term debt

There’s nothing inherently wrong with using long-term debt to cover short-term costs if it’s part of a plan for, say, ramping up operations quickly, but if there’s no strategy behind it, it’s a sign cash has become a problem, he said. 

“If you’re seeing a company take out long-term debt just to meet short-term expenses, that’s a warning sign because short-term expenses can become long-term very quickly,” he said. “When you’re in that position, it’s best to cut costs than to borrow.”

4. Tax payment delays

No one likes to pay the IRS, but asking for delays because you don’t have the cash is a sign that you haven’t managed liquidity well, which will cost you more in the long run. “Especially for smaller businesses, the IRS will just beat you to death,” he said. 

5. Too-fast growth

Fick also said growing too fast can be a warning sign, because it can point to a misalignment between your accounts receivable and your accounts payable.

“So, you’re selling to Walmart or Target and they require you give them 90-day terms,” he said. “They’re the big players. If they say 90 days, it’s really 100 or 115 by the time they cut the check or run the automated clearing house (ACH) or whatever. What your vendors require of you are 30-day payments, and you have no power over them. So, you have to basically float that difference for 90 days. If you’re having trouble with that collection process, that is another big warning sign.”

Best practices

Fick suggested five best practices for effective management of your cash.

1. Communication

It’s imperative that finance executives communicate their forecasts accurately, because miscommunication can lead to decisions that don’t match what’s happening. The company “might borrow more that it needs to meet conditions that don’t materialize or they can leave funds unnecessarily idle, which I see very often, actually,” he said. "Communication is the best way to avoid a liquidity crisis. You always want to forecast [business] drivers, not the number. Effective communication is a best practice regardless of the [market] environment.” 

2. Cash flow vs. revenue

Cash flow and revenue both indicate your company's financial health, but revenue is about the effectiveness of sales and marketing, while cash flow is a function of liquidity or money management. Fick said cash flow can be negative, but revenue really can’t be unless there’s something very wrong with the company. To measure cash flow, don’t forget to include money that comes in through other channels separate from the sale of your core product or service. 

“Companies obtain cash in a variety of ways outside their main business,” he said, including “interest, warranty fees, other fee income — even SaaS has a set-up fee — one-off projects for professional services like fixing things.”

3. Inflows vs. outflows

Fick said you should identify all sources of inflows and outflows and then work to maximize inflows while minimizing outflows, and to a large extent that means focusing on timing.

“If your customers are asking for 90 days and your vendors are asking for 30 and you have no power over your suppliers, that’s an issue,” he said. “You can use things like supply chain financing (SCF) to ask your vendors to give you longer terms. Maximize timing, extend your payment terms, understand your control of them.”

4. Scenario planning

Creating scenarios in the FP&A function is common, but it should be done for cash, too, he said. 

“What scenarios do, especially for cash, is they provide a playbook for you. What ifs,” he said. “Having these ifs before they happen helps you think through and build that playbook, so if it does happen, you’re executing and not thinking.”

Tariffs provide a good example. “Tariffs affect the P&L but they also affect cash and future business.”

5. Variance analyses

Fick recommended you set tolerances for what you can accept when actuals come in at a variance from your projections. If you set a tolerance of, say, 5%, you're prepared to take action once you hit that difference from your projection.

“There might be customers who fail to pay,” he said. “Sales don’t materialize, you see unexpected expenses, you have to understand and analyze those in the short-, mid-, and long- term. Nothing is set in stone.”

Despite its importance, cash can be a challenge to manage. But by knowing some of the warning signs and following best practices, you can help protect your company from that gravest of all ills: not being able to meet your company costs because you’ve run out of money.

Cash flow, generally defined as the net amount of cash transferred in and out of a business, is king — especially when the economy is as uncertain as it has been since the pandemic. 

"It all starts with the cash flow statement," says Alonso Ramos, CFO of artificial casings manufacturer Viscofan USA. "I recommend you update cash flow on a monthly basis," because it's critical for tracking revenues and customers. "It should be as comphrehensive as necessary for the size of the business include all the money coming and coming out for the month."  

Any company's ability to create shareholder value is determined by its ability to generate positive cash flow, making it a vital metric across industries. But staying on top of operating, investing and financing cash flow is not always easy or intuitive. It's incumbent upon CFOs to have a keen awareness of their company's cash flow, particularly when all other aspects of the business become less predictable.

The three KPIs factoring into Ramos' cash flow calculations are accounts receivable/days outstanding, stock coverage and days payable outstanding. "You don't want to be delayed on payments," Ramos said. "Especially now."

"It's very important to manage the KPIs that will help identify opportunities to improve cash flow," he said. "[The KPIs] start with accounts receivables days sales outstanding, that represents how fast the money is recovered from the customer," but also is necessary to perform sensitivity analysis on the metrics, "prioritizing the top customers that represent a larger percentage of sales," Ramos said. "If a customer represents 80% of our sales, and we want to calculate days outstanding, that number will be very important." 

Ramos has established his cash flow predictions through the end of 2020 and all the way to the end of 2021. He typically plans 12 to 15 months ahead. The actual amount of forecasting doesn't matter, he said; it's the diligence in planning that's key. And he sub-divides payments from Viscofan's major providers into groups based on operations, administration, insurance and taxes.

Turning to the treasurer

"In March and April, a lot of companies needed to shore up their balance sheet in order to survive," Tom Hunt, director of treasury services for the Association for Financial Professionals (AFP), said. "The focus really became more on the balance sheet than on the income statement."

In his practice, Hunt sees treasurers' (and other finance leaders') top KPIs as committed and uncommitted credit lines. To build a liquidity buffer against events such as the pandemic, these executives have opted to tap into bank syndication and holding cash.

"Assessing which credit lines are available, with which banks you have relationships, and where you can draw upon excess credit is really paramount when you don't know what's going to happen," Hunt said. "Cash is a company's lifeblood, so being able to meet short-term needs and making payroll and making payments to vendors is vital."

In dire situations, companies tend to look inwards to see where they can make more cash available, Hunt said. "And what that's amounted to, for a lot of treasury professionals, is digitization of payments — trying to convince vendors to accept an ACH or electronic payment instead of check. That impacts cash flow too."

Hunt looks at two forms of cash flow. The first, operating cash, Hunt defines as cash needed in the next 30 days. The second is a rolling liquidity forecast, which he looks at to meet payroll and AP.

"A lot of those payments are to utilities and tax authorities: things you don't want to have signaling to the industry as being delayed or uncertainty-causing," he said. "You want to maintain operating cash as much as you can."

Treasury and FP&A professionals are doing ample multi-faceted liquidity planning amid the pandemic, Hunt said. Instead of three-way scenario analysis, they're doing 14-way.

"Reporting what used to be weekly to the CFO is now done on a daily basis or even once an hour," he said. "They'll report on what credit is available to shore up the balance sheet, what cash balance is going in or coming out versus what's been forecasted, how much cash is on hand in the event we can't access capital markets."

A focus on cash origination is also key, he said. "Many [AFP] members are talking to their banking partners and looking at a lot of digitization efforts, looking for ways of being more streamlined and efficient, with a goal of making sure cash flow is of utmost importance."

How often a company should look at its cash flow statement depends on a handful of factors, he said. "Look at net investors and net debt positions. Each position looks at cash flow in a different lens, and it varies by industry; a retailer looks at it with much different seasonal flows that a factory person."

Large, publicly held companies tend to report much more often, probably on a daily basis, he said.

Reporting at that frequency can put a big burden on Treasury teams, but today's uncertainty is unusual. "During times of stress, where the company is working remotely, sometimes demand exceeds what it's capable of," Hunt said. "Treasury will always rise to the challenge and be in the liquidity game, but recognizing there's always room for improvement; certainly where treasury teams are small and tasked with doing more with less."

Growth mode needs cash flow

Peter Habelitz is CFO of Netherlands-based Cycas Hospitality, which is near-doubling its open hotel portfolio within the next six months. Amid the growth, he said, the adage "cash is king" has become even more true.

"In times of crisis, cash becomes exponentially more important," he said. "And it has made having a sound cash management practice the single most important factor."

Securing adequate financing and ensuring available funds are employed efficiently is imperative to Cycas' success, and is significantly more important than the usual P&L metrics or balance sheet KPIs, he said.

"My EBIT [earnings before interest and taxes] can look all rosy, but if I don't have enough cash to perform on my financial commitments on future investments, the growth plan will derail," Habelitz said. "Especially off balance sheet items and cash traps, like collateralized guarantees, which can easily make your cash balance look healthy, when, in reality, there's a large cash outflow you weren't aware of."

Habelitz and his team spend significant time developing proprietary tools to keep on top of its cash flow, both on a consolidated corporate level as well as on an individual hotel level. These tools include a mid-term cash flow model that maps out its cash-in and cash-out flows on a monthly basis over a rolling five-year period. Meanwhile, a second model calculates working capital needs for each project over the next five years, as well on a monthly basis.

With these tools in place, Cycas forecasts its operational business' full cash requirements, as well as for upcoming projects, on a monthly consolidated basis against actual cash flows, while incorporating any updates.

"Doing this ensures we can identify any upcoming cash needs and effectively move funds around as needed," Habelitz said. " We have developed a deep expertise in cash flow control and that has been instilled into all parts of our organization."

Company-specific cash flow strategies

Unlike other industries, like retail or manufacturing, hospitality has a naturally positive working capital cycle, Habelitz said.

"Receivables and inventories are minimal, and, as such, we don't need to invest significant energy on optimizing working capital and maximizing cash flows out of it," he said. "However, long-term financial commitments, such as lease contracts, drive our business, and with that, our landlords require deposits and guarantees for security."

Cycas strategically optimizes its balance between cash deposits and use of bank guarantees and insurance, and constantly looks to optimize other factors, including timing of rent payments.

"Our tactics focus on individual projects and ensuring cash flows are optimally structured and lead to an ideal level of cash from a consolidated perspective at any given point in time," he said. "We look to deploy cash in periods when there's excess available, and retrieve the cash back into the business during periods of increased cash-out flows."

In times of negative interest, Habelitz doesn't want too much cash sitting idle in a bank account, costing Cycas money.

"Having a fitting set of cash flow focused KPIs in your weekly or monthly reporting is definitely very important," he said. "It does very much depend on your business which KPIs those are."

When Habelitz worked for a manufacturing company, he managed and reviewed days sales outstanding and inventory turns on a daily basis, because they were the most difficult to influence and most complex to manage.

But for a business-to-consumer [B2C] company where most sales are paid directly with credit cards, for instance, days sales outstanding wouldn't be a meaningful KPI to track, he said.

At Cycas, classic working capital KPIs are less relevant.

"Since we have a range of different agreements with our banks, we do have cash-related covenants such as liquidity or interest cover ratios, which we monitor on a regular basis," he said. "But our main focus is on the deviations between the actual cash flow and our cash flow forecast." Understanding these deviations enables him to improve modeling and forecast accuracy, manage cash and initiate corrective actions.

Simultaneously, he includes any investment proposals in his cash flow model to evaluate the impact, as well as available funds within the next 24-36 months.

Cycas' strategy is aligned to cash flow measures, and all ROI assessments are based on cash flow metrics. This will change over time as it reaches different growth stages, Habelitz said, but cash flow will always be vital.

His team is developing a set of liquidity KPIs to monitor its secured vs. unsecured guarantees and commitments strategy. "This will allow us to easily monitor the potential cash risks and their coverage to ensure we are prepared in case an unsecured guarantee was to be called," he said.

Cash in crisis

"Cash is obviously important for every company, and especially in times of crisis," Habelitz said.

"To ensure your business is successful, it's vital to stay on top of your cash flow, use the right KPIs to monitor it and to consider the impact of any business decision on your cash flow," he said.