Findings from a poll of more than 1,800 C-suite executives show that while liquidity management remains a major concern as the pandemic drags on, many are failing to take effective action.
The data was compiled by Deloitte during a recent webcast entitled Improving liquidity management: Scenario-based cash forecasting. It reveals that the pandemic has shifted executive focus from long-term planning to more immediate business concerns, pushing forecasting capabilities into the spotlight.
But while the majority of firms acknowledge that they have been struggling with forecasting, appropriate remedial action appears to be limited, with many still failing to recognise the value of improved cash visibility.
The top findings include:
- During Covid-19, forecasting was either the top liquidity and cash management challenge (13.8%) or among the top challenges (54%)
- Despite the difficulties, 84.6% feel confident in their organisations’ abilities to manage cash and liquidity
- Increased frequency of forecasting seems to be the new norm with 8.2% reforecasting every other week and 11.5% forecasting daily
- 31.4% are updating cash flow and liquidity management plans monthly, 24.5% are updating plans on a weekly basis, and 7.2% are not making any changes to their plans
- Only 13.5% currently use specific technology for working capital management, 18.8% are planning to implement related solutions in the next 12 months, and 46.8% have no plans to use advanced technology in their liquidity management efforts
With disruption from the pandemic ongoing, Anthony Jackson, Principal, Deloitte Transactions and Business Analytics, notes that the frequency of cash flow updates by businesses has been increasing. But he believes this is not necessarily the diligent approach it appears to be.
“When people say they are updating daily, I don’t think that would be considered running a cash forecast. I think they are just tracking their cash balances,” he remarks. While increased frequency most likely serves as an indicator as to whether the business has sufficient cash levels to survive, he argues that daily or even monthly forecasting may not be best suited to an active cash management response. A weekly approach would, instead, be the recommended timing.
A second beacon of information Jackson observes within the data concerns the percentage of respondents citing liquidity forecasting as one of their main challenges. At almost 70%, he feels this sits uneasily with the relatively low percentage (46.8%) who have no plans to leverage advanced technology to improve their liquidity management efforts.
The data suggests that many firms have been panicked into taking frequent cash readings, but then lack the tools or understanding of cash drivers to do anything about it. For Jackson, this is a sign perhaps that these respondents are not familiar with the tools available to help them forecast more effectively and efficiently.
“It may be that they’ve just been trying to survive by focusing on cash forecasting, where it hasn’t necessarily been a priority for many of these businesses before,” he says. Of those that have been doing it, he believes many have just been using Excel and a lot of manual input. “They may be getting to a place where they think they now have the visibility they need, and so feel no need to invest in further resources.”
Some companies have seen fit to change their approach to the business drivers they use in their forecasting, notes Jackson. With the onset of Covid-19, he says many of the traditional drivers couldn’t be relied upon anymore due to the economic impact of the pandemic on their business.
With historical data, for example, no longer an effective guide to the future under pandemic conditions, he observes an increasing number of firms exploring artificial intelligence (AI) and machine learning (ML) “to give them additional insight by drawing upon outside drivers and perspectives”.
While most businesses have been forced to focus on forecasting during the pandemic, it’s likely that some may decide that, once the main economic aftershocks have subsided, they will revert to their old forecasting practices, says Jackson.
However, Jackson is “hopeful” that a large proportion will see the value of what they have been doing and continue developing their approach. “It may not be with the same level of urgency that the pandemic imposed upon them, but companies can take the lessons of their experience and apply them going forward.”
A new focus
In a December 2019 article that featured in The Wall Street Journal’s Risk & Compliance section, Jackson along with Matt Lew, Senior Manager, Deloitte Transactions and Business Analytics, cautioned companies with their headline, ‘Don’t Wait for a Liquidity Crisis to Scrutinize Cash’. In the piece, they argued why companies should be investing resources into building new forecasting models and approaches to give them strategic advantage.
Should a crisis occur (Covid-19 at that stage was not on the radar), then those able to draw upon new strategic insight would be in a far stronger position. And under normal trading conditions, those companies that had invested would retain the advantages afforded by sharper forecasting.
The suggestion that a strong focus on forecasting could eventually lead to the creation of the Chief Liquidity Officer (CLO) role has some value. In reality, it’s a role that many treasurers already undertake, but enabling greater focus has advantages. “It goes to the core of what we are often telling companies they need to do,” comments Jackson.
The CLO, or an equivalent entity such as Deloitte’s cross-functional ‘cash council’, needs executive sponsorship to drive the cash forecasting process across multiple functions. Senior support also provides the authority needed to ensure all functions required to participate will see the value in doing so, and thus assume full accountability for their input.
Bringing cash into focus in this way delivers greater visibility and control. As anecdotal evidence, Jackson refers to a large and organisationally complex client that had seemingly unpredictable swings in working capital.
Missing forecasts by up to 40% often led to serious cash challenges. Following Deloitte’s intervention, a cross-functional cash council was established. Treasury sat at the centre, taking overall ownership, collating cash data from the leaders of each participating function, each of which harboured specialist knowledge of its own cash flows.
“We put the accountability and ownership within the business units for them to drive the modelling and forecasts for their own component,” he explains. With treasury collecting data, weekly meetings with business unit leaders were held to review the results, compare actuals to forecasts, and discuss variances and scope for improvement. “It took time to embed the process and thinking across the organisation, but it was a very successful solution.”
The survey results indicate some issues, largely caused by unprecedented global conditions. But Jackson believes that by recognising the value of improved cash visibility, deploying the right tools, and establishing the most effective supporting structure, forecasting can become a very effective activity, and one that will serve all businesses well post pandemic.