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 is today.

"It all starts with the cash flow statement," Alonso Ramos, CFO of artificial casings manufacturer Viscofan USA, said. "I recommend to update cash flow on a monthly basis," as it is 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.