Navigating uncertain times

Cash management in stressed conditions

Put cash management and forecasting at the centre of your resilience plan, optimising your agility and helping you react to rapid change.

The COVID-19 pandemic has triggered deep and rapid disruption to businesses worldwide. Regardless of size, sector or region, falls in demand, supply and productivity are impacting liquidity, and many companies are worried about being able to meet their outgoings. The situation is changing fast and businesses need to be agile. Already in this crisis, many businesses have shown their inventiveness and ability to react quickly.

While countries are taking different approaches to handle the pandemic, working with businesses in times of stress and uncertainty, we see that cash flow management should be at the forefront of resilience planning.  

Start forecasting cash flow in the short- to medium-term

The ability to continually assess and adapt is made possible through Short Term Cash Flow (STCF) forecasts. Now more than ever, forecasting can help the finance team and the board manage liquidity over the coming days, weeks and months. This can help you spot approaching pinch points and cash shortfalls, giving you the insight to make the right operational decisions.

An STCF forecast helps you identify what improvements you can make to cash control. It helps inform what actions to take reflecting the economic environment. Short-term forecasting will also help you develop other tools such as early warning dashboards, and it can determine the right trigger points for decision-making to provide enough time to implement action. It will also inform your scenario planning and help you anticipate mitigating measures if the business experiences a sudden fall in demand.  The minimum expectation for most companies is a forecast of between 12 to 14 weeks; it is advisable to span a full quarter to cover significant payments such as VAT, corporation tax and rent.

Use forecasts in your communications with stakeholders

Forecasting is also an indispensable tool in your communications with lenders and partners. Banks considering extending finance to your business will not be able to support all businesses to the same level simultaneously. Having a clear plan, supported by reliable financial forecasts, will provide comfort to all stakeholders, improving your chances of accessing the necessary funding.

Producing an STCF can be a new challenge for some, and requires a different sort of modelling from that which businesses might be more familiar with in normal times. Weekly forecasts need trends and variations you'd ignore in a monthly model and weekends rarely match month ends, so it will be increasingly hard to reconcile your weekly forecast to the same period of your monthly forecast.

There’s always a balance between the value to be drawn from forecasts and the work that goes into them. Weekly projections are likely to provide the best insight for the work involved. Daily forecasts can involve a lot of extra work without improving foresight. But if daily liquidity is a worry, you can overlay an additional page that does the first two weeks on a daily basis. Establishing a template and method enables you to roll forward and repeat the exercise over the following weeks – right up until the end of the year.

Identify where to retain cash in the business

Through frequently reviewing and updating your forecasts, you should be in a position to spot where the risks of financial failure lie as well as the opportunities to generate cash more quickly.

Establishing effective methods of cash collection and adjusting terms of payment to both suppliers and customers are critical to minimise the financial impact. Quick implementations and reactions are needed across key areas such as online sales, inventory management, distribution formats and servicing the vulnerable safely. Clearly, during a crisis, the desire to work quickly is understandable – and sometimes necessary. But take the time to examine what impact your actions will have in the medium- to long-term.

There is a range of actions you can take. Where your customers and debtors are concerned, introduce more efficient billing and collecting processes. You can also negotiate with customers for them to pay early or upfront by offering them a discount or other concessions.

With regards to your debtors, negotiate payment deferral with landlords and banks where possible. Many governments at this time are proactively supporting businesses and introducing concessions into their tax collecting system. You should fully explore what tax concessions are available to your business, and investigate any available government grants or other support.

Taking as much direct and indirect cost out of business to protect cash flow is advisable, but only if doing so allows you to continue at an efficient and profitable level. You can move idle cash from other areas of the business into your capital account, or draw down on availability in your banking facilities

Strong cash forecasting allows you to assess your priorities. Make sure that your key suppliers and customers are ring-fenced and that both are supported through this crisis. The most prudent advice amid this uncertainty is to simplify your business where it makes sense to do so. By concentrating on fewer core, profitable outputs, you may end up with a slightly different business, but with a healthier bottom line and a more secure customer base.

For more information about strengthening your cash position  speak to a local Grant Thornton adviser.