3 Remember "cash is king“

What is the issue?

Businesses that emerged as sector leaders from the last recession typically had an average net debt-to-equity ratio of about half of their less successful competitors before the downturn hit. Successful businesses also held significantly more cash on their balance sheet than their less fortunate competitors.

What do I need to be aware of?

Businesses that do not manage cash as a priority ultimately may not be able to pay their liabilities and consequently risk being forced into an insolvency process. Managing cash should be an every day priority, and in a downturn, we would also suggest bearing in mind the following:

  • Reviewing the adequacy of banking and other financing arrangements
  • Assessing whether financing arrangements are still adequate in the light of changing circumstances
  • On-going monitoring of corporate performance against financial and non-financial covenants
  • Communicating openly and frequently with key stakeholders to enhance transparency and avoid surprises
  • Adopting a distinctively active hands-on approach to cash management, e.g. short-term cash flow reporting and forecasting, immediate investigation of variances
  • Aggressive working capital management, i.e. ensuring customers pay to term, securing best possible payment terms from suppliers, assessing adequacy and quality of stock levels
  • Reviewing discretionary and non-discretionary expenditure and assessing what the business really needs
  • Enhancing controls over purchasing and order processes (core and non-core) by lowering authorisation limits and introducing increased senior management accountability.

What questions should I be asking myself?

  • To what extent am I familiar with our obligations and our existing facilities?
  • How regularly am I updating my financial stakeholders? How aware are they of our current situation?
  • What opportunities are there to re-negotiate or to adapt existing financing arrangements as our business model and trading environments evolve?
  • How effective have I been at implementing cash generation and cash preservation initiatives? What further measures can be taken?
  • What processes have I introduced to manage cash proactively and to properly monitor progress?
  • Am I reviewing our debtor book regularly? Who is managing the process? What targets have been set?
  • How effectively are we managing creditor payments? Is there anything else that can be done without damaging relationships?
  • To what extent have I taken control of inventory management?
  • Have we reduced or eliminated any non-core and discretionary expenditure? Who is accountable for this initiative? How much progress is being made?
  • Are there any other sources of cash that can be readily accessed? For example, are there any surplus assets that can be disposed of?

How can PwC help?

Drawing upon a network of expertise and the experience of our professionals, we help you enhance your cash management processes. Check the column on the right for details of who to contact and for further information.