Cash Management – more important than ever

Earlier this year we posted our six-point guide to cash flow management. The six-part series ended on the 13th March with “Where to turn in times of distress?”. At the time, we had no idea just how timely the series was. After nearly 9 months in a global pandemic, cash management remains one of, if not the, key focus for businesses. As we move into 2021 businesses should be reflecting on 2020 and continue to optimise management of cash. 

Our series has been updated following some lessons learnt this year as well as additional guidance for businesses in their cash management journey.  We trust you will find it informative, and would welcome discussion on how to apply it to your specific situation.

1) Cash flow forecasting

In our 16th January edition we advised that having a well-constructed and considered forecast will help to prepare for fluctuations or issues. The uncertainty of the situation and unpredictability in local and national lockdowns in 2020 has made this difficult for businesses, however knowing the businesses cash position, immediate liquidity requirements and modelling multiple future scenarios, factoring in government support is a key requirement. Although future planning at present is more rooted in guesswork than usual, it remains a critical part of ensuring your business is ready for a range of eventualities. 

We recommend the use of a 13-week cash flow forecast model. Although seemingly an odd time period, it covers weekly, monthly, and quarterly payments. It is short enough to allow for sensible assumptions but long enough into the future; and should a cash deficit be forecast steps can be taken to reduce/mitigate the impact. Including additional “scenario specific” adjustment lines to your model will ensure you understand the implications of various government support schemes such as furlough, loans, deferral of VAT and rent on your current and future position. 

2) Planning for the worst case

In our second instalment of the six-part series posted on the 23rd of January 2020 we advised “Planning for the Worst”. It is safe to say that all the planning in the world would not have prepared us for what was to come, no one (quite rightly) would have forecasted a period of zero demand. That being said, it is evident that our clients who had previously planned worst case scenarios, consistently held stronger cash positions, were more resilient and fared better than those who did not. 

We will continue to encourage our clients to think through a reasonable worst case (now aptly named ‘2020 case’), alongside a ‘mid’ and ‘best case’ analysis. This will give teams the scope and headspace to hone-in on more accurate scenarios. Planning then becomes a powerful tool to enable the business to understand what is likely to happen and how to manage the situation.  This should not be a finance only activity, involving the wider management team and identifying the drivers of performance will ensure a better overall outcome. 

3) Monitor and review

If COVID-19 has taught us anything it is that cash flow forecasting shouldn’t be a one-off event completed as a result of a crisis. It sounds obvious to say, but encouraging your team to adopt this habit and consistently reforecast even beyond the pandemic will prepare the business better for the future. The forecast needs to be routinely updated, regularly refreshed, and reviewed in light of new and improved information. In doing so, not only does this give you an essential tool to spot warning of trouble, but also the quality and accuracy the information will gradually improve. Creating a more powerful financial management tool, and a virtuous cycle that gives your team more confidence to support the organisation to weather any storm. 

4) Cash management cycle

Accurate cash management is circular and needs constant input from across the team. Here’s some simple ways your team can be proactive:

  • Both sales and invoicing obviously drive cash flow. Invoicing on time is simple but can often be overlooked. The sooner the invoice is issued the more likely you are to get paid. Clearly other factors which are more difficult to control may impact customer payments, however invoicing on time will allow for any queries to be addressed and still achieve a timely payment
  • The overall age debtor balances should be reviewed at least weekly and conversations with slow paying customers should be tackled as soon as any delay can be foreseen.
  • Despite prompt invoicing, some clients may remain slow payers. Late payments should be picked up as soon as possible, even before they become overdue. Your finance team should make sure they maintain simple visibility what payments are becoming due and which are overdue. 
  • Telephone conversations with clients, reminder notices and issuance of clear payment instructions are all simple and effective tools, and late payment interest clauses can be useful in client contracts in certain circumstances. 
  • If professional advice is needed from a debt collection agency this should be sought sooner, rather than later, as the opportunity for success for recovering the full invoice value is much higher the at the outset.

5) Accessing Funding

Once your team establish a cash flow forecast, the next step is to make sure that your sources of funding to match your goals. Today, there are more options available in the market than ever before. So narrow down choices by being clear on what you are trying to achieve. Do you need to overcome a temporary cash flow gap or provide longer-term capital investment into the business?

The choice of funding type can have knock-on impacts on choices available down the line, so needs to be thought through in the context of your longer-term strategy. For example:

  • Invoice discounting options work well in the right circumstances. However, they only provide a percentage of the invoiced amount. 
  • Unsecured loans or credit lines can be more flexible but may have higher interest rates. 
  • With hire purchase reduce the need for up front funding, but you won’t own the asset until the end the contract. 
  • And don’t forget to look at available grants. If a grant scheme matches your business goals, then this can be a very cost effective option.

Each is appropriate in the right circumstances and building in consistent decisions throughout the whole of the cash management cycle is essential to reaching your business goals.

6) Where to Turn to in Times of Distress? 

Our final piece in the series posted on the 13th of March required little adjustment. This series highlighted areas where your team can focus simple, effective steps to improve cash flow management practices during time of distress. There is so much “noise” from competing demands on your time and attention, and the team can easily become overwhelmed by the unfamiliarity of the situation. But ignoring it, or even trying to treat it like ‘business as usual’, certainly won’t help. So now what…?

The vast majority of the time, the capability and resource needed to address gaps in cash flow management exist within the team. But it’s important to recognise when it’s valuable to use external advice to support your team. If used in the right way, specialist knowledge and experience can not only help in stabilising and improving distressed situations, they can increase the confidence of the team and leave them feeling better equipped to deal with challenges going forward. Then you’ve not only addressed the immediate situation, but also created the opportunity to build greater resilience in the business for the long term.

All of us feel like we have been given whiplash this year with a barrage of good and bad news. It has been confusing and stressful. Inevitably the road of the next few months and years will continue to remain rocky, and the highs and the lows of the ever evolving situation will be distinct. However, having a conscious and considered eye on the businesses cash position and how you will get the support you require, will make it a more bearable journey.  

Get in touch to find out more:

Kelly Jones, Turnaround & Transformation Director kelly.jones@kingsgate.uk.com