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Managing cash for COVID-19 and beyond

Simon Rowan By Simon Rowan,  September 02, 2020

Simon Rowan explains how businesses can manage their cash more effectively, whatever the prevailing market conditions

The Covid-19 pandemic has forced many businesses to focus on conserving cash and marshalling their resources like never before. But the truth is that cash management should always be a business priority: unless you understand the flow of finance into and out of your organisation, it is impossible to plan for a sustainable future – whether in good times or bad.

The pandemic prompted unprecedented government intervention, with a range of financial supports offered to help businesses through the crisis. But the principles of good cash management do not change. Every business affected by Covid-19, both now and in the future, should consider claiming any help that is available, but a focus on the fundamentals will always be vital.

Model the future

Some businesses will find the exercise of modelling revenue easier than others. Those with recurring revenues – monthly subscriptions for a product or service, say – will find forecasting more straightforward. Businesses that depend on project work may have very good short-term visibility of revenues, but may not yet know which projects they’ll be working on in six to nine months’ time. For businesses with more lumpy revenues, the future is harder to predict, but your experience and market knowledge should help you make informed projections.

However difficult, every organisation needs to assess the pipeline of business heading its way. Your estimate should be as educated as possible, based on what you know about your customers and the broader market conditions. Are your clients currently trading well? What terms are you doing business on – for example, can clients cancel subscriptions and contracts? What is the market outlook – what macro-economic or sectoral issues might affect your business, positively or otherwise?

The idea is to build an accurate top-line picture of your likely revenues, taking into account both the opportunities and  challenges that lie ahead. And this doesn’t have to be a one-off exercise. It makes sense to review the budget regularly – say on a quarterly basis. How accurate were your forecasts? Where they were inaccurate, what caused this? Do your forecasts for the rest of the year now need adjusting accordingly?

You can also use this process to stress test your business. You’ll have a baseline forecast for the next 12 months, but what would be the impact of more negative or unplanned for scenarios?

Focus on real-time trading

Having considered the big picture, you can then zero in on the detail. Quarterly cash flow forecasts – a model of what your business will achieve at a granular level over the next 13 weeks – will be based on today’s performance. The business’s real-time trading gives you much better visibility of what the short term is set to bring. That should make it much simpler to identify potential pinch points.

At this level of forecasting, it’s possible to apply all sorts of different sensitivities to your model in order to understand how resilient your cash flows really are. For example, where your debtors currently settle their bills within 30 days, what would it mean if the economic backdrop forced more of them to slip to 45 days? Would your business still be able to meet its liabilities? What if certain customers go out of business and don’t pay at all?

Flex the model to consider whether your business is robust enough to cope with all sorts of different circumstances, taking into account what’s going on in the real world right now. Many of the variations you push through the model will never come to pass, but this doesn’t mean the exercise was a waste of time.

As with top-line forecasting, the point of 13-week cash flow modelling is to understand as accurately as possible what is likely to happen to your business in the coming months.

Act on your forecasts

Forewarned is forearmed: once you have a good idea of what’s coming your way, you can prepare the business accordingly. In particular, where your modelling suggests cash flow pressures ahead, you can take action to avoid what would otherwise have been unpleasant surprises.

There are many different ways to conserve cash, but there will often be a balance to strike between protecting cash flows and jeopardising future growth. For example, it may be easy to cut back on variable costs such as marketing activity, but moving too aggressively will undermine future revenues. The same is true of cutting back on capital investment and of your workforce.

People-intensive businesses may even find it costs them more in the long run to let people go and then hire them back when the outlook improves. Consider alternatives to redundancy – would staff be prepared to take a pay cut for a short period, say, or to move to part-time working? Or can the business afford to accept that staff will be under-utilised for a period, on the grounds it will then be ready to exploit opportunities now coming over the horizon?

Don’t be afraid to talk to suppliers and landlords about your cash flows. For example, it may be possible to negotiate extended creditor payment terms to reflect your debtors’ shifting behaviours, or even to discuss rent deferral terms with landlords.

Nor should you overlook opportunities to improve cash flowing into the business. Is it eligible for support such as R&D tax credits, for example, or other allowances that many businesses fail to claim? What can you do to encourage your debtors to settle their bills more speedily?

Talk to finance providers

Finally, it’s crucial to be proactive with your lenders. Businesses that talk to finance providers early will often get a double benefit: not only is there more time to resolve problems, but they also get credit for running well-managed operations and therefore attract goodwill and support.

For example, if your forecasts suggest there is a possibility of breaching debt covenants, disclose this to lenders well ahead of time. Where your modelling suggests you may need to draw down on existing facilities, or even to arrange new sources of funding, give yourself time to execute your plans. Revolving credit facilities, for instance , may not be available at the precise moment you need help.

Where you have good relationships with lenders – based on your transparency and honesty – you will often find empathy and understanding. They may be prepared to offer capital repayment holidays if you can maintain interest payments. They may be able to vary the terms of your funding to reflect the changing market conditions.

Talk to equity investors too. While such investors are likely to have a good idea of what’s going on in the business, keeping them fully informed well ahead of time may help you secure additional support.

The bottom line is that thinking ahead will get you out of trouble. It won’t be possible to avoid all the bumps in the road, but your forecasting should enable you to see them coming in plenty of time to plot a sensible path.

If you want to talk in more detail about managing cash and forecasting for the future, please get in touch with Simon Rowan on 0313 225 6699 or simon.rowan@dunedin.com.

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