Over the last 18 months, Anna Lenskaia, a finance director in manufacturing and international trading, has been running the finance function of a US$100m construction materials operation supplying a large infrastructure project.

She explains that the rolling liquidity forecast has been perhaps the most valuable tool in managing the mismatch between receipts and expenditure and the length of the approval cycle.

While the annual cash flow forecast is “worth having”, it sits a long way from reality, she notes. As a result, “the annual view becomes a reference and the live document is a monthly forecast, corrected weekly as visibility on receipts changes, with a daily cash position underneath it that I get from the treasurer.”

The value of this exercise is knowing precisely which outflows cannot move. The three main categories are advance payments (where a supplier of a rare material will only work prepaid); post-dated cheques; and taxes and payroll.

“There is one more layer people underestimate and that is currency,” says Lenskaia. “Free conversion into the currency you need is not always available. So the forecast is not one number – it is a balance held per currency, and a position that looks comfortable in total can still be short in the specific currency a payment has to be made in. Managing that balance is a planning decision, not a treasury back office task.”

Negotiating with suppliers

Leaving aside obligations with a date attached, Lenskaia’s criteria for prioritising payments is whether or not making a payment would stop production. The list of priority payments is deliberately short because anything that does not directly halt production goes into the second tier, which she describes as a permanent negotiation.

“That negotiation is understated in treasury literature,” suggests Lenskaia. “Every supplier has a tolerance and the skill is sensing where a particular supplier sits on that curve and reopening the conversation before it runs out, rather than after they stop delivering.

“What makes the conversation work is that the difficulty is temporary, and the supplier can see it is temporary because they can see the project going ahead. In my experience they will accommodate you if you come to them early and then keep the commitment you made.”

She likens supplier patience to a credit line in that it is not on any balance sheet, has no documented limit and it is the cheapest funding available – right up until you draw on it without telling anyone, at which point it becomes the most expensive.

Two other potential sources of cash are money owed by non-customers and intra-group payments.

“Tax refunds due from the state had been sitting in the balance sheet for a long time, and recovering them took sustained work, but that is cash you do not have to earn twice,” says Lenskaia. “It rarely gets the attention it deserves because it is in nobody’s job description to chase it.”

She adds that the transfer of funds between a parent company and its subsidiary – or between two subsidiaries within the same corporate group – can be held back by owner agreement while the external queue of payments is cleared.

Tough conversations

“By the time you are ranking invoices, you are managing damage,” reckons Lenskaia. “The decision that mattered was taken when the commitment was signed. In a manufacturing business earlier in my career, purchase approvals were checked against the cumulative annual budget, so the budget looked intact until late in the year and people bought ahead just in case.

“We moved approval to the request stage – before the contract – and changed the comparison basis to a computed run rate. That removed a category of payment pressure instead of reordering it.”

According to Lenskaia, the difficult part of the job is not delivering bad news about a payment date – it’s making the argument that the priority right now is not taking money out of the company, but rather continuing to operate without losing revenue or margin.

“That is an uncomfortable case for a finance director to put, because you are telling the owner not to take his own money,” she adds. “What makes it land is that it is arithmetic rather than a plea. Cash retained in the business protects volume. Volume protects revenue and margin – and a distribution deferred by a quarter costs less than an interruption to production.”

The other thing that matters is where the conversation happens. A shareholder who is asked to approve a difficult sequence remains an owner of that decision, whereas a shareholder who is informed afterwards becomes an auditor of it and that relationship does not recover quickly.

“There is a timing rule underneath all of this,” concludes Lenskaia. “The moment to reset an expectation is when the forecast shows the gap, not when the date arrives. That is harder than it sounds, because the forecast shows you the gap while you still believe you can close it and the temptation is always to wait one more week.

“Shareholders forgive bad numbers – they do not forgive being surprised.”