Filip Ceulemans: ‘Too much cash is tied up in inventory and in receivables not collected in time’

For many companies, managing working capital is a huge challenge
  • Create a 'war room' with key executives responsible for key processes
  • Cash is King
  • A tool like ‘Cash Analytics’ extracts all the necessary data from your ERP

‘Working capital is the key area to work on for companies that want to improve their cash position in these Corona times,’ says Filip Ceulemans, Client Partner at CFO Services. ‘Too often, cash is tied up in receivables which are not collected in time.’ Focusing on revenue, cost control and business continuity is essential for survival. In this interview, Filip explains what companies can do to stay afloat during the most severe economic downturn since the Great Depression.

Before Filip Ceulemans started as a client partner at TriFinance, he worked at PWC in consulting, focusing on M&A, due diligence, and business recovery. As a CFO in a listed company in London in a niche market of the chemical industry, he merged major business units and developed working capital tools and cash flow forecasting for the company. Filip also held several positions as Managing Director.

Keeping business operational

For you as an ex-CFO, several alarm bells must have gone off during a (health) crisis like today’s pandemic. Companies really must focus on business continuity to keep their business afloat. What kind of measures would you take to keep business operational?

Filip Ceulemans: ‘It is all hands on deck these days. A company’s main focus must be on keeping the business running. In our global economy, we all optimized our processes, especially in terms of the supply chain. If one area in the world is in trouble, we all are in trouble. The Corona outbreak has proven that the way we have set up business today has become really fragile.

‘Companies must first of all keep on delivering to customers, which is quite a challenge. Following up closely on your supply chain is key. Some suppliers in Northern Italy cannot deliver because their factories are closed. Companies must also stay in close contact with their customers, making sure they keep ordering and collaborate with them to solve issues that might arise.’

Keep on sellin

It is interesting to see how in the last few weeks, companies have started to reorganize their production. Dyson has started to make ventilators for hospitals. Companies that made building materials started to produce masks. It looks a bit like a wartime economy where companies reconvert their production to products that society is in dire need of, like in this case healthcare supplies.

Filip Ceulemans: ‘There is indeed this shift in the economy. The system is quite fragile, but companies bounce back, becoming more and more creative by focusing on local markets, indeed producing materials for the healthcare industry. Restaurants have to close, but they start to cater to hospitals because healthcare workers are working day and night, and they are providing these people with healthy food. People are being extremely creative in order to keep on selling because that is the engine of our economy.’

‘Talking about the mid-term, thinking about alternatives to run your business, and shifting your business model is crucial. Good examples here are the already mentioned restaurants that start catering to healthcare workers, Dyson, lingerie producer Vandevelde that started producing masks, L’Oréal going into hand sanitizer, and Limburg Beverage manufacturer Konings that started producing 225,000 liters of denatured disinfectant alcohol for the Belgian market.’

Stress tests are always useful, but it's preferable to do them when things are going well.

Filip Ceulemans

Cost-cutting, stress tests, and war rooms

Apart from a focus on revenue, companies should also reduce costs

Filip Ceulemans: ‘If your sales drop, the only thing you can do to survive is cutting costs. That also means a lot of the investments are being postponed, which will have a lasting effect on the economy as well. At the end of the day, cash is king. Every company has to fulfill its obligations. If not, they will become bankrupt.’

‘Cutting costs is no rocket science. It is common sense that you go through your P&L and your cost centers line by line, focusing on your largest cost contributors. In a crisis situation, it is important to go far in reducing expenses. Long-term investments are generally put on hold. Most companies don't think about the medium term anymore. Everything revolves around the short term and what is needed to stay alive.

What about stress testing your financial plans by using scenario approaches?’

Filip Ceulemans: ‘Stress tests are always useful, but it's preferable to do them when things are going well. A stress test is meant to check whether you are prepared for a crisis. When in a crisis, your energy is better directed towards other issues related to the survival of the organization. Companies today would do well to create a 'war room' with key executives responsible for key processes like production including supply chain, sales and marketing, finance, human resources, and communication. They meet daily at the beginning of the crisis and report weekly to the CEO. Over time, they can switch to a weekly meeting rhythm.’

Low on cash

What advantages do cash-heavy companies have over others who are low on cash?

Filip Ceulemans: ‘Depending on the industry they are in, some companies will do better than others. Technology-savvy and IT-related companies will certainly be doing well. Others, in the hospitality industry or tourism, or traditional companies are certainly struggling. Of course, the more cash you have, the easier it will be to fulfill your commitments and give security to your suppliers. When they look at your balance sheet and see you have a load of cash, they will be happy to keep on supplying you. If they see you have huge debt already they will most likely no longer want to supply you with goods or services because they know you are getting in trouble.’

What to do then if you are low on cash?

Filip Ceulemans: ‘Companies should always focus on their working capital. Too often, cash is tied up in receivables which are not collected in time. In general, we see that companies have been working on negotiating better payment terms with their suppliers over the past few years. Certainly in Europe, you see an improvement there.

‘In that respect, size matters of course. Larger companies can use their buying power to negotiate favorable payment terms. Smaller companies are in a weaker position there. In many companies, finding the right balance in inventory management is not easy.

‘In difficult times like today, companies should ensure that not too much cash is tied up in inventory, meaning that they have to manage that working capital component very well. On the other hand, because of hiccups in the supply chain, you should also ensure safety stock levels in order to keep on producing.’

Do you think the hiccups in the global supply chains will radically affect the economy, in a way that countries will start producing strategic goods themselves again?

Filip Ceulemans: ‘Absolutely. I believe the view on strategic stock levels and strategic inventory will certainly change, especially in health care and the domains the government is accountable for. You will also observe this mind shift in the industry. But when we are back to ‘normal’, companies will start to optimize their inventory levels again. Striking that right balance will be essential. I really see that shift taking place in the mindset of CFOs and CEOs.’

Working capital, CAPEX, personnel costs and taxes are the main buckets to optimize your cash flow

Filip Ceulemans

Optimizing cash flow

What can companies do to optimize their cash flow?

Filip Ceulemans: ‘There are several buckets to optimize your cash flow. Working capital is the first one. We are talking payables, receivables, and inventory. The second bucket is the CAPEX, or investments. As I already mentioned, a lot of investments are now being postponed, which will have an impact on a company’s future expansion and growth.

‘A third bucket is personnel costs. In Belgium, the government has significantly broadened the system of temporary unemployment, opening it up to all companies that cannot put their employees to work or that cannot offer normal working schedules due to the Covid-19 outbreak.

There as well, it is important that those who can continue to produce or deliver their services to avoid a domino effect in the economy at large. Road builders for instance said they were willing to continue construction work, but for that, the whole chain should remain operative, from the concrete and steel factories to the people who are responsible for signage and safety. Temporary unemployment definitely reduces personnel costs

‘The last bucket I see is taxes. The government issued some tax measures that should mitigate the impact of the crisis. Payment of personal income tax, withholding tax, VAT and social security contributions have for instance been deferred. VAT filings and payments are being delayed. There’s an accelerated refund of VAT credit and a 4-month deferral of payment of annual road tax. That will get companies some relief.’

Improving working capital with Cash Analytics and the 13 week Cash flow forecast

The key area that companies should work on is working capital. You keep emphasizing that.

Filip Ceulemans: ‘Indeed. First of all, companies should analyze in detail their payables, receivables, and inventory. Already during the financial crisis, we developed the ‘Cash Analytics tool, basically a Power BI tool. It was specifically developed to perform this detailed analysis quickly. We used it in 2008 and 2009 during the financial crisis to help companies improve their working capital. It has already greatly proven its benefits.

‘Cash analytics’ can easily be put on top of any ERP system from which it then extracts all the necessary data. 'Cash Analytics' gets you a clear insight into working capital components like your receivables and payables. It enables you to come up with an action plan by showing you which customers and suppliers in which countries you need to work on. The output is a detailed analysis for you to focus on areas that are large enough to get you a quick, efficient improvement of your cash position.

‘Not having a tool like ‘Cash analytics’ means you have to start from scratch, using excel, capturing all the data from your ERP manually. That will take way too long, and if you already have cash flow issues, it will be too late. Having this tool extract all the data that is embedded in your ERP delivers the analysis you need to come up with an action plan. You don’t waste time at a moment when there’s no time to waste.

‘Next to that, there is the '13-week cash flow forecast' for companies that are on the verge of bankruptcy. It is a rolling forecast that is updated on a weekly or daily basis, depending on the situation you are in. The 13-week forecast immediately highlights in which week you could get in trouble, having cash flow issues. It shows you which payments to suppliers can be shifted and that you get your cash in a little bit earlier. At least, it gives you a good view of the 13 weeks to come and where you might have issues when you don’t act; when you will have to pay your suppliers and there will be insufficient cash. When you can predict that, you can take action to try to prevent it from happening.’

Getting your processes right

Cash also has to do with the soundness of your processes, doesn't it?

Filip Ceulemans: ‘Definitely. Processes must be smooth and transparent. After the crisis, many organizations will need to review and improve those processes so they are set up in the best possible way to recover from this crisis and to be prepared for the next one. Transparency end-to-end is a prerequisite. You have to understand the existing situation well and expose the pain points before you can remedy the shortcomings. These are usually a mix of people who do not follow the process correctly and of issues with the process itself.’