"P&L is vanity, Balance sheet is sanity, Cash is reality"

Huge thanks to? Manuel Kallies Asbj?rn Kastaniegaard Bj?rn T?lb?ll and Troels Angelo for contributing to and co-authoring this article.

As the global macroeconomic outlook continues to provide create considerable uncertainty.?Now, more than ever, it’s imperative for businesses to optimize their financial resilience . At BCG, we recognize that the best leaders turn uncertainty into opportunity.

Our latest CEO’s dilemma edition, delves deeper into this imperative - LINK

Here’s a quick preview of the playbook: Focus on cash, rebalance trade-offs between expenses and flexibility, build agility into your planning and reporting, and adapt financial policy and investor messaging.

?Cash management as a topic

Liquidity (as a topic) has traditionally gained less management attention than the P&L and Balance Sheet. But as the cost of capital continues to increase, the question becomes how to unleash the value potential of smart cash management.

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Companies often resort to lump-sum CAPEX cuts, evenly distributed across business units, and while reducing CAPEX is one lever to free up cash, it is rarely the most relevant or impactful one.

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In BCG, we work with five topics to help companies secure liquidity:

-?????????Cash & liquidity management

-?????????Working capital optimization

-?????????CAPEX optimization

-?????????(Re-)financing

-?????????Divestiture of assets/units

A holistic approach is essential to reduce net working capital and increase business agility.

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No “one size fits all” solutions

Unsurprisingly, there are no “one size fits all” solutions when it comes to cash management; the applicability of levers depends on the starting point. To see how, we take the view of two different business units and how they could approach cash management:

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An underperforming BU must focus on self-controlled performance to fix the issues at the core. This means activating levers within cost, working capital and discretionary spend to course correct.

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Whereas an overperforming BU must be selected to keep momentum and maximize value capture. For this business unit the value-optimizing levers are typically in working capital and in fine-tuning topline and CAPEX effectivity.

The three steps to smart cash management

?Knowing what levers to pull and when to pull them is, in our experience, insufficient. To master cash management, it is key to ensure the right process, end-to-end. The best firms follow three steps to optimize their cash position:

1.?????Establish a solid starting point and ensure a common understanding across stakeholders

2.?????Set ambitious targets and let them be informed by strategic priorities

3.?????Define governing mechanisms to ensure timely delivery and obtain buy-in from top management

These steps will not guarantee success, but it will surely help you plan for it.

?Case example

BCG recently supported a client who had seen an uptick in net working capital (NWC), and had significant difficulty forecasting capital requirements. By activating a range of comprehensive, yet targeted levers, NWC was reduced by 40% and the need for re-financing was reduced by 80%. This enabled the client to fund high-growth BUs, and accelerate performance with minimal reduction in CAPEX spend.

Path forward

In sum, the best companies avoid kneejerk CAPEX cuts and piecemeal initiatives to address cash and liquidity. Rather, they address the topic through a holistic program, informed by strategy, robust governance and rigorous follow-up.