TT330: Cash flow forecasting in uncertain times

September 10, 2020

The phrase ‘cash is king’ is one commonly used in times of financial crisis that make cash a more valuable asset than holding other forms of investments.  However, for businesses, it is much more than that and it becomes a critical success factor to turn profit into cash to pay debts as they fall due.   It is in these times of uncertainty that the businesses best equipped to weather the storm are those who have been giving priority to cash flow and the principle of ‘cash is king’.

To help identify and satisfy the needs of investors and other stakeholders over and above the basic information available in the annual statutory accounts, the following core questions need to be answered:

  • How much cash is being generated from the operations of the business, both in the current period and in the perceived future?
  • Is the generated cash likely to be sufficient to meet the company’s strategic objective and, if not, where will the required cash come from?
  • What is the company planning to do with the cash it generates, especially beyond the servicing of its current operations?
  • Is management being effective and efficient in its use of cash?

Hopefully, the following tips will be helpful in answering the above.

Knowing where you have been

The starting point in any management of cash flow must be reporting on what has already happened. The cash flow statement in a set of annual statutory accounts is of course useful as far as it goes so it may also be useful to reconcile cash flow statements to profit and loss and balance sheet movements to understand the detail.

Knowing where you are

Although obvious, six actions which businesses might take with regard to the “tips” below:

  • manage cash outflows;
  • take professional advice;
  • manage cash inflows;
  • access government-backed support;
  • contact your bank and/or financial providers;
  • update your cash flow

Knowing where you are going to be

The inexact nature of forecasting is of course compounded in this situation by no one knowing how long or how consistent the recovery will be.  But what is not in doubt is that cash flow forecasting is even more crucial than usual. Again, many of these points may seem obvious, but it is well worth ensuring that decision-makers are fully aware of them. There is a need to:

  • produce rolling weekly and monthly cash flow forecasts;
  • look further ahead if there are known large payments due, g. loan repayments; and
  • develop a range of flexible cash forecasts with various possible scenarios from best to worst case scenarios for receipts of cash.

Our tips to successful cashflow reporting and forecasting include:

  • The highest-ranking executive in the business should take overall responsibility for cash management if there is a risk of business failure;
  • ensure responsibilities, reporting lines and staff cover for all cash-related matters are clearly understood throughout the business;
  • set up regular ‘cash meetings’ involving those with insight on predicted cash movements;
  • build up forecasting effectiveness by combining business experience with the best available evidence and improving forecasting processes;
  • design cash flow reports to support critical business decisions and funding applications; therefore they should be understandable by non-accountants;
  • maintain controls over cash flow reporting;
  • increase frequency of reporting and consider whether to report on monthly, weekly or daily cash movements;
  • maintain underlying data in as much detail as possible – this enables maximum flexibility in reporting.

To discuss the above further, or if you have any concerns about your own cash flow forecasting, please do not hesitate to reach out to your contact at Barnes Roffe for further advice and support.

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