So... what is a cash war room?
Firm experts explain how we are helping clients weather the economic downturn and beyond
As coronavirus spread around the world earlier this year, financial uncertainty across industries and geographies gave way to shock. Like many, CEOs and CFOs were stunned by the scale, pace, and complexity of the crisis; they faced a dramatic falloff in business while having to grapple with health concerns for their employees, not to mention their own families. Colleagues saw this fallout firsthand in their virtual meetings with clients.
“They were frozen,” says Kevin, a Senior Partner in the Chicago Office. And it wasn’t the internet connection.
“You have these confident, high performing executive teams who pride themselves on being ahead of the curve,” Kevin says. “But with economic and health implications, COVID-19 sent the world spinning so fast that many business leaders understandably had trouble getting their heads around both variables.”
That’s where the “cash war room,” a centralized space to prepare for and respond to economic uncertainty, comes in.
The cash war room emerged out of McKinsey Transformation a year ago to help clients prepare for the possibility of a recession. The primary goal: to help clients move quickly and think strategically about how to maximize liquid cash to run their businesses if cash flow slows.
But for many, COVID-19 made this goal an urgent necessity. In the early days of the virus, clients expressed confidence in their resilience plans. Within a matter of weeks, however, many realized they did not have sufficient downside scenarios in place and turned to the Firm to help test their plans. Others needed direct support and advice to quickly preserve available cash. Since COVID-19 emerged, colleagues across regions have hosted hundreds of client and CST conversations through the cash war room, directly supporting clients through related engagements.
The way a client reacts to these challenges can be the difference between them thriving or shuttering. Sam, a Partner in our Chicago Office, says, “Working on a cash war room study spurred by COVID-19, it is easy to get caught in the stress of the moment. But then you take a step back, and you realize you’re doing a transformation driving $100 million of impact without setting foot anywhere at a time when our clients are in need.”
“A lot of these situations aren’t actually ‘how do we drive cash?’ but instead ‘how do we drive success and transform a client to meet changing needs?’ Cash is just a piece of that journey.”
—Seth, Senior Partner (Charlotte)
Transforming businesses through a cash mindset
While worst-case scenarios can be intimidating, the cash war room’s analysis aims to calm clients by preparing businesses for the changes ahead.
Seth, a Senior Partner in the Charlotte Office, notes, “These conversations less predict what will happen to a business during COVID-19, and more explore how a company should transform so that it can survive the worst scenarios and thrive in the best ones.”
In some cases, companies find they are better prepared for imagined outcomes, and that they can focus on a growth strategy tailored to those environments. For underprepared clients, Seth says, “Initial panic at forecasts leads to proactive conversations about ways forward. Clients ultimately find this knowledge comforting.”
“Like-minded colleagues across the Firm are coming together to help CFOs around the world improve performance at the intersection of commercial, operational, and financial decisions.”
—Kevin, Senior Partner (Chicago)
As companies consider the road ahead, there are several ways of measuring their performance. A widely used metric for long-term profitability is EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization), but this calculation does not incorporate money owed and due, or the costs of maintaining fixed assets. The lesser-flexed measurement muscle is cashflow, which accounts for the cash currently available at a company’s disposal.
Seth says, “The cash war room analysis resets the agenda on what’s most important to sustain business through the crisis. The biggest issues in the COVID-19 context stem from companies accustomed to forecasting earnings but not to focusing on cash. Now more than ever businesses require more detailed planning to make sure they can live to fight another day.”
Expanding a client’s cash runway means identifying ways to free up and raise capital. The tools of the cash war room help achieve this, first through a rigorous review and monitoring of spending to immediately reduce costs, and second through a longer-term lens that helps clients strategically pivot in response to severe economic scenarios while maintaining a cash mindset.
In combination, these tools are helping clients make difficult decisions about how to garner enough cash to weather the COVID-19 storm. That said, though cash may be king, it is not the end. Seth explains, “A lot of these situations aren’t actually ‘how do we drive cash?’ but instead ‘how do we drive success and transform a client to meet changing needs?’ Cash is just a piece of that journey.”
Transforming relationships
As we work to aid clients in their COVID-19 transformations, we’ve also had to transform the way we support CFOs. Typically, CFOs engage our Firm during mergers and acquisitions, but we’ve been able to offer a different kind of value throughout this crisis.
With our support, CFOs have already turned cash war room conversations into action, using digital monitoring tools to prioritize payments and quantify liquid assets. They can operate with better awareness, making not just incremental changes, but reevaluating modes of operation with significant near- and long-term impact on revenues and costs.
In recent weeks, Kevin says the conversation with CFOs has shifted to the next normal as many organizations have stabilized their day-to-day cash flow.
“The challenge of COVID-19 has created a moment for CFOs to lead and influence the day-to-day and long-term trajectory of their organizations like never before,” says Kevin. “Like-minded colleagues across the Firm are coming together to help CFOs around the world improve performance at the intersection of commercial, operational, and financial decisions.”
He adds, “Through this, we become real impact partners for them.”