Lessons from the Recent Past: How Technology Can Help Your Company Avoid a Liquidity Crisis

Less than a decade ago, the economy was in free fall and banks and other lending institutions were in serious jeopardy and calling out to the government for help in staying intact. Indeed, we saw many long-established (and apparently sound) financial institutions fail. At the heart of the crisis was the loss of available credit. In 2009, I was given a unique assignment to help a well-known manufacturer deal with the precarious loss of available short-term credit to fund its weekly operations. My client, with offices/operations around the world, needed to know its exact cash position on a weekly (preferably daily) basis. We accomplished the task with much effort, but the work highlighted the fundamental need for working capital oversight and planning.


And once the immediate crisis passed, the larger question still loomed. How would the company prevent itself from being so vulnerable the next time?


The Problem: Then and Now
In my role as a financial analyst back in 2009, assessing and projecting cash position was typically a task done after the budget was finalized and performed over the course of several days. Usually, the work took the form of a spreadsheet built with numerous assumptions, some very broad and general, to arrive at an “educated guess.” In addition to being time-consuming to build, the resulting working capital plan was largely inaccurate and difficult to explain. Hence, it was rarely repeated when semi-annual forecasts and revisions were made.

Given today’s geopolitics, coupled with ongoing competition and an overhaul of trade policies, there is every reason to believe that we could face such a liquidity crisis again. Consequently, companies should be assessing their current working capital position and planning for working capital needs as a natural part of their annual and semi-annual planning exercises. But most financial systems in place don’t make this easy.


How Technology Helps
CCH Tagetik helps companies address this challenge efficiently and with new levels of accuracy. All entries to the budget are actually double-sided entries. A number does not merely sit on a report; it affects the corresponding balance sheet and P&L accounts. CCH Tagetik then moves the entry over time according to DPO (days payable outstanding) and DSO (days sales outstanding) schedules that can be general or specific (even at customer and product level). A revenue item isn’t just a number appearing on the sales line; it moves to billables and then receivables based on the timing of the (customer/product) billing schedule, which then turns into a projected cash inflow based on the terms of payment. The same is true for expenses. They go from being a recognized item on the P&L into a cash outflow based on the vendor payment terms. All of this is automatically maintained in CCH Tagetik. While there is some initial level of effort required to set up the rules, they remain and are reused continuously across multiple versions of a plan and forecast, even as new assumptions are needed.

Cash Flow Planning
The Result: Full Understanding of Working Capital
Your organization can now seamlessly go from a plan or a forecast to a projected balance sheet and a projected cash flow and working capital analysis. In fact, you have a full understanding of your working capital needs for the length of your projection so you know where working capital shortfalls will occur. And CCH Tagetik can help you go one step further by allowing you to setup your credit lines and bank account balances (all updated from your ERP or corporate systems).

The system can calculate the cost of capital for any shortfall periods and can even plug in the cost of capital to your budget automatically. More importantly, you have the ability to drill into these forecasted results, see where you have the most exposure, and thus take action in advance – all from reports that only need to be setup once and then can be reviewed and reused continuously.

Don’t Rely on Luck to Avoid the Next Crisis
Your business can’t afford to continue planning on luck and generalized assumptions. Realistic planning across every aspect of your operations is needed to see potential exposures and risks. With today’s economy and credit uncertainties, a best guess will not do. To minimize risk, you must model for potential scenarios. With CCH Tagetik, you can see the working capital risks in advance, model for these changes, and develop contingency plans should credit and cash become difficult to obtain. This is not just good cash planning; such work will potentially save interest expense and prevent future disruptions to business operations.


Do you want to discover more about the CCH Tagetik Solution for Cash Planning?



Cash Flow Planning

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