Effective cash flow and working capital forecasting can be the difference between the success and failure of a company during a time of economic or market uncertainty such as that inflicted by the Coronavirus pandemic.
Anticipating potential future working capital pinches and cash shortfalls enables business owners to plan more effectively and to make premeditated decisions such as prioritising key supplier payments and communicating with other suppliers to reassure them of actions being taken. Where large payments are due, such as deferred rental payments or capital repayments on debt, forward planning can assist with meeting these through careful management of the working capital cycle.
The same principles that are applicable to forecasting during ‘normal’ times apply to forecasting during times of uncertainty, such as ensuring the validity of key inputs/assumptions, maintaining accurate records, and obtaining input from a variety of departments outside of the finance function, such as the sales and marketing team. However, in the current environment, we recommend a number of additional considerations when preparing financial forecasts:
Reduce the reporting interval
Where cash flows and working capital are expected to be put under significant strain, and in the absence of an adequate cash buffer, consider reducing the reporting interval to move towards shorter-term forecasting, such as weekly or even daily. This is very much in line with the nature of forecasts that banks have traditionally used to monitor businesses with uncertain short-term cash flows.
The nature of forecasting in uncertain times reduces the usefulness and reliability of long term forecasts and as such we recommend focusing on realistic expectations for shorter time periods, such as the next three, six or 12 months. The most appropriate time period will be influenced by things such as your industry, the quality of information you have access to and the timing of major payments, such as loan repayments or payment of deferred supplier balances.
Increase frequency of reporting and shift to a rolling forecast
Due to the constantly changing nature of the economic environment we are experiencing, we recommend revisiting these forecasts at least weekly or fortnightly to ensure that the assumptions remain relevant.
Reducing the period of time covered by the forecasts as set out above should be combined with frequent updating of the forecasts and switching to a rolling forecast.
Cash flow focus
The age-old maxim ‘cash is king’ is never truer than in times of economic instability. We would therefore recommend ensuring that forecasters move away from traditional profit and loss focused models and towards cash flow and working capital focused models, considering key receipt and payment dates and the overall working capital cycle.
There are currently a number of volatile factors impacting on business performance, such as lockdowns, government support packages and constantly changing consumer sentiment. These are ever changing and could shift markedly over the coming months and into next year.
For example, a scenario manager can be developed as part of a set of forecasts created in Microsoft Excel. This then provides a central location to record the inputs for the primary drivers of your forecasts, enabling them to be easily flexed across multiple potential scenarios that a user can easily toggle between across Excel worksheets.
As a minimum, we would recommend preparing a ‘realistic’ expectation scenario as well as a worst-case scenario to allow for contingency planning, with easy assessment of minimum cash balances under each scenario.
Major payments and covenants
Forecasts should consider compliance with any covenants in place with external lenders as well as major repayment dates.
For businesses that have benefitted from VAT deferrals, PAYE deferrals or government-backed loans, these should all be considered in the forecasts to ensure that there is expected to be sufficient cash to make these repayments as and when they fall due.
Where companies have benefitted from rent deferrals or payment holidays over the previous two quarters, discussions should be held with landlords to agree repayment plans. Where such communication has not yet occurred or where conclusions are yet to be reached, businesses should forecast prudently for these repayments.
At Saffery Champness we have worked with a number of our clients to ensure that their forecasts incorporate the features mentioned above, in particular to support CBILS applications and to scenario plan for potential future events. Forecasting has never been more relevant or important and if you would like any support please do get in touch with your usual Saffery Champness contact.