Embracing change into your Cash Flow Forecast

In our article of 9th April 2020 entitled How to vaccinate your business, we discussed the importance of cash flow forecasts.

This, the latest in a series of articles focusing on the importance of cash flow, provides you with the factors to consider while preparing your cash flow forecasts. It is safe to say that it is not business as usual and your cashflow forecasts need to be revisited and prepared accordingly. As a business owner, you and your fellow board members need to try and embrace the change that is coming.

We have divided the cashflow forecast into 5 major categories.

1. CUSTOMERS

Retail StoreAs a starting point in any cash flow forecast, you need to understand what your cash ‘inflows’ are likely to be.

Firstly, you need to focus on your cur rent trade debtors and assess their collectability.

This is the time to start the discussions with your debtors to understand when they will be able to pay you and if they cannot pay on time, what plans can be put into place. This will allow you to understand what effect it will have on your debtor days ratio and ultimately your working capital cycle.

Secondly, you will need to analyse your customer base. Please see below a few examples of the factors you will need to consider:

  • How many customers will I retain post lockdown and how much business will they still require?
  • At what rate will you be able to bring in new business?

Thirdly, you need to consider diversifying your income if possible, to adapt to the changes that COVID-19 will bring to your business environment.

2. SUPPLIERS

Warehouse StaffOnce you understand your cash ‘inflows’ you can start forecasting your supplier payments. Should there be a situation whereby you will not be able to pay all your suppliers as they become due, it is important to be proactive and communicate with them. Most suppliers will feel more at ease when they are updated on your payment plan. Silence will give them unnecessary concerns.

Post-Covid 19 you will also need to consider the changes to sourcing your products, and for manufacturing businesses, how your supply chain management will be affected. These will ultimately affect your costings. So, it is important to revisit your costing model and update it with the necessary changes.

This is an extremely important exercise and will be a defining factor in determining your working capital cycle.

3. OPERATING EXPENSES

Working on accountsNow is the time to also perform an analysis of your operating overheads to determine what costs are necessary. For services/expenses that are necessary for your business, you need to determine if a better solution is available in the market place.

You will need to consider if your current infrastructure will accommodate changes to the business environment. Some considerations have been listed below:

  • Are you set up to work remotely? (You may need to replace desktops with laptop computers)
  • Will your business post lockdown meet social distancing guidelines? (For a manufacturing business you may need to consider automated aspects of your production cycle to meet the guidelines)

This may require an initial capital outlay which could have a material effect on your cash flow forecast and require financing.

This process, just like suppliers discussed in point 2, needs to be matched with your forecasted sales revenues. This will enable you to ensure that your business is sustainable into the future.

4. INTERNAL CONTROL ANALYSIS

To embrace the changes inevitably brought about by a changing marketplace, it is important to revisit your internal controls within your business built up over time, to ensure they continue to be relevant. This will provide you with an action plan to implement the assumptions you have incorporated into your cash flow forecast.

Internal controls, if implemented correctly, will assist in the elimination of unnecessary bureaucracy or conversely adding more controls to improve productivity, a key component in being successful in the future.

This will ultimately lead to maximising/maintaining the level of profitability in your organisation. We recommend that an independent party performs the internal control review as it will provide an outside perspective of your business. At this time, there is a need for “thinking outside of the box,” which will be required when embracing change.

5. LOAN & HMRC PAYMENTS

It is important to include in your cash flow forecast deferrals of any loan or HMRC payments as this can assist with your short term cashflow requirements.

Regarding any bank loans, it is important to communicate with the bank in advance if you forecast that you will experience any cash flow difficulties. It is recommended that preventative measures are put in place before any payment(s) become due.

If you are deferring any payment to HMRC you need to ensure that you comply with the necessary legislation to be able to do so.

In much the same way as it is said that tax deferred is tax saved, so it is with these payments that can reasonably be deferred or better phased, gives a business the greater chance of survival. We believe that the items discussed above outline the contributing factors that will have a significant impact when preparing or revising your cashflow forecast, which should be done on a rolling 13-week basis.

In conclusion, the changes in the business environment that are coming will mean that your cash flow forecast will assume critical importance by demonstrating both internally in the business itself and externally to those outside it, that the business is properly managed and has a full understanding of its funding needs going forwards.

Please note:

This article provides general advice and does not cover any specific market sector. Furthermore, this article does not include all the factors you need to take into consideration when preparing your cash flow forecast.

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