How to navigate post-pandemic financial challenges and optimise cash flow

Barely recovered from the Covid health crisis, company cash flows have been severely tested since the start of the war in Ukraine. For the past 2 years, companies have had to cope with problems linked to energy costs and increased supply difficulties. 

Although the situation seems to have normalised, the successive instabilities have prompted managers and financiers to focus on 3 key areas: 

1. Monitoring and steering cash flow to anticipate financing requirements and investment opportunities
2. Stress-testing their organizations to find opportunities for improved cash flow
3. Exploring the various financing levers available

Let’s take a detailed look at each of these three factors, and see how you can keep your own business clear of serious cash woes.

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About the author

Benjamin Madjar is CEO and founder at Cashlab. Cashlab combines SaaS tools, expertise and training to optimise cash flow and treasury management. Connected to its ecosystem, Cashlab uses analysis and projections to enable rapid decision-making, optimising working capital and facilitating the implementation of financing and investment solutions.

Cashlab's experts also support their customers in cash-related areas, such as the budgeting process, optimising working capital and training in cash culture.

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1. Manage cash flow to anticipate financing requirements or investment opportunities

A business, whatever its size, is a complex animal whose every component has an impact on cash flow.

In this context, the manager, CEO or MD builds a strategy that will be reflected in the business plan (for the next 3 years, perhaps) and, in the shorter term, in the operating budget for the next 12 months. 

For most, there is no question of financing requirements, cash flow generation or cash management. 

Your strategy likely needs three additional components to be complete:

1. Convert the income statement into a cash flow forecast with cash inflows and outflows. This lets you reconstruct EBITDA as well as the change in WCR, and identify the potential for improvement.
2. An investment plan
3. Loan maturities and other financial flows

By running a few simulations, the CFO can then detail the short-, medium- and long-term financing requirements and compare them with possible solutions:

• Internally: optimising WCR by managing trade receivables, trade payables and inventories.
• Externally: optimising working capital by implementing solutions such as factoring, reverse factoring or inventory financing.
• Other investment or Capex financing

In addition, you need to set one or two objectives, and put in place one or more underlying indicators, particularly for cash flow. Once the course has been set, it can then be applied at operational level to identify areas for optimising EBITDA and WCR. 

For example, let's take a group with sales of €360m, €70m in trade receivables at the end of April 2024, and estimated financing requirements of €30m between now and the end of 2024. We’ll use this example shortly.

2. Stress tests to identify opportunities for improved cash flow

On the strength of experience shared with more than 100 clients, we’ve found that successful working capital optimization takes some testing. Your best bet is to launch a company project that brings together all the operational teams that have an impact on the operational processes for managing working capital.

For example, it is common to initiate action on the management of trade receivables. The internal levers involve examining the accounts receivable management process and, in particular, initiating the following actions: 

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Customer management that distinguishes between good and bad payers helps to finance trade receivables.

Now back to our example.

Suppose optimising the processes for managing trade receivables generates a few days' improvement in DSO (Days Sales Outstanding), from 70 days to 65 days. 5 days' reduction — if daily turnover is €1m — generates €5m in working capital savings and cash flow.

So by reviewing its trade receivables and the underlying processes (contracts, payment terms, invoicing, reminders), the group could generate €5m in gains and therefore find €5m of the €30m needed. 

3. Identify the different financing levers available

There are many financing solutions, most of which are now based on guarantees or assets. A precise breakdown of your WCR items lets you estimate the potential for each component more accurately. 

We can again use receivables as a lever, this time to raise funds. 

In the example above, if you issue €1m of invoices per day, or €30m per month, depending on your eligibility and the quality of your invoices, you could benefit from estimated financing of between EUR 25m and EUR 30m. 

So, with two actions focused just on your trade receivables (internal optimisation and a smart financing solution), you could meet your financing needs by the end of 2024.

Conclusion

Cash flow forecast + internal actions + financing solutions = your cash plan for 2024!

With the right expertise and technology, finance departments have the tools they need to prepare their financial reporting easily, anticipate their needs, and identify areas for optimisation and investment.