As central banks are battling the highest inflation rates in 40 years, interest rates are rising rapidly—and are inadvertently casting a spotlight on an area of finance that has not been a primary focus: liquidity forecasting and working capital management. For decades now, financing costs for businesses have consistently been extremely low, so liquidity has not been a primary concern. But as the world turns, so do economies and interest rates.

The importance of working capital management

Rising financing costs mean CFOs need to find new ways to understand and closely manage their cash and liquidity, and change is needed. In his numerous conversations with finance executives, Thomas Mehlkopf, SAP GM, Head of Working Capital Management Centre of Excellence, states, “Many executives say they do not have access to the up-to-date data they need to carry out accurate liquidity forecasts or working capital planning.” It is not unusual for available data to be several weeks old. You can’t achieve much with outdated data—especially in today’s rapidly changing environments.”

For the foreseeable future, you must be prepared to manage liquidity and cash flows with high levels of accuracy so your business can understand the impact of inflation, act quickly, and be prepared for what’s next.

How prepared are you today to cope with macroeconomic changes?

Take a self-assessment to determine if you are prepared for inflation, or any macroeconomic changes, by answering the following four questions:

1. How confident are you in your cash flow and liquidity forecast? Are you able to easily include real-time data and impacts from sales and commodity price developments in your forecasts?

According to Mehlkopf, few CFOs and treasurers would say yes. The reality is that most liquidity forecasts are done in spreadsheets, and it takes them days, if not weeks, to gather the necessary data from across their organisation. So, by the time they do reporting and forecasting, the data is out of date and analyses are no longer accurate.

To understand the impact, businesses need a way to gain insights into different risks, exposures, and actuals in one financial system so you can manage working capital optimally—for example, by:

• Preparing for rising commodity prices by forecasting future cash flows
• Understanding your FX and interest rate exposures so you can effectively implement hedging strategies
• Balancing risk, stock management, and customer service to manage stock targets
• Uncovering savings opportunities with real-time intelligence across enterprise-wide procurement

2. How easily can you find and release cash tied up in your business and supply chain?

Without effective working capital management tools and processes in place, finding and releasing cash tied up in business and the supply chain is not easy. The ability to respond swiftly to urgent business events or opportunities as CEO and CFO is more important than ever, and yet most companies are not prepared to do so. Having visibility over your entire cash conversion cycle is a good starting point.

3. How prepared are you to handle what comes next in our unpredictable, ever-changing world?

To be prepared, you need the agility to respond swiftly and effectively to forward-looking insights and forecasts. This requires having the right strategy, the right tools (such as a flexible working capital management platform that provides a centralised view of liquidity and scenario planning functionality), and the right processes for proactively managing impacts.

4: Is there CFO leadership to establish cross-company working capital management targets and an aligned strategy?

Managing liquidity and working capital is a company-wide effort. Think of it as a team sport that requires strong CFO backing. Only the CFO can break through layers of departmental resistance to sharing data and work with stakeholders to determine what to prioritise and which strategy and goals to set.

If you leave all this for different departments to work out, you’ll end up with conflicting goals and a misaligned strategy—something no company can afford any longer in times of high liquidity costs and uncertainty.

So, how did you get on?

Were you able to answer all four questions? If you could, brilliant—you’re in the minority today, and that’s a good place to be. If not, please know that you are not alone. The good news is that inflation management solutions are available to help you take control of your liquidity and working capital. One thing is certain—liquidity will remain a key concern, especially in the context of an impending recession. So, there has never been a better time to focus on this area.