Cash is King – Especially Now!

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The current business environment has never been tougher or more uncertain. Whilst a lot of businesses have been in survival mode, many businesses are now looking at how they can progress and prosper as the Covid constraints show the first signs of easing.

Control and forecasting of cash is key, not only to ensure survival, but also to check that the business as enough working capital to fund the upturn in business, when it eventually arrives. Decision making always benefits from some realistic analysis of the facts! “Cash is king” is of course a cliché, but it has never been truer! Here are some ideas to ensure you stay on top;

Produce a Cash Flow Forecast

Look forward at least a month, and preferably three months, to track the business’s income and expenditure; project your bank balance on either a weekly or monthly basis. This is never an easy task, so make sure you use the resources you have. Your in-house accountant/bookkeeper or the external Accountant can help, or indeed CMC Partners.

A cash flow forecast isn’t just a spreadsheet exercise – it will provide a firm foundation for any of the tough decisions the business needs to make. Cost cutting, redundancies, new capital/borrowing, increasing marketing and sales targets are factors that all need to be considered. What are your plans for the coming months; and do they produce a viable financial outcome?

Beware of the Short-Term Improvement in Cash

Two of my clients have seen dramatic falls in sales since the start of the pandemic, yet their cash balance at the bank has actually risen – why is this?!

This is a common phenomenon, but is counter-intuitive. What has happened is that the company has been able to continue to collect the money from their debtor customers for their earlier sales, whilst their expenditure has been reduced, and in a lot of cases, staff have been furloughed. However, this positive effect is only a short term; the majority of the pre-Covid debtors will have paid by now, and subsequent payments from customers will be at a very much reduced rate. A further problem will arise when business levels start to improve, because your customers will not pay your bills for typically 30 to 60 days, then cash levels will fall despite rising sales. Having enough working capital at the point sales start to rise is essential.

Scenario Planning

Of course, no one has a perfect view of the future, and the current environment presents a series of circumstances that are genuinely unprecedented. Forecasting is therefore even more difficult than normal. A way to accommodate this is by running a number of different scenarios. Sales levels usually provide the most uncertainty; so try running say three different cash flow forecast scenarios based, say, on a high, medium or low level of future sales. This provides “sensitivity” for the range of different outcomes and helps you understand where the key decision points will lie.

Do you Need to Borrow?

Your cash flow forecast will show you if you need to consider borrowing cash. Even if the cash flow levels look OK, having additional funds available will act as an insurance policy. As a note of caution this should only be done if the business is very confident that the money can be re-paid. I’ll limit my comments to two particular government backed schemes.

  • Bounce Back Loan; up to £50k, no repayments for 12 months, then repayments over further 5 years of capital and interest at 2.5%. A relatively simple application process, no need for projections or personal guarantees. Some eligibility criteria. If cash is tight and you believe that repayment will not be an issue, then this is great and probably unrepeatable offer.
  • Coronavirus Business Interruption Loan (CBILS). Aimed at businesses that can demonstrate that they were viable before the pandemic and can provide detailed financial information (management accounts, forward cash flows and budgets, historic accounts etc!). This is similar to a traditional bank loan application process, with some considerable hoops to jump through to get past the application process. The major difference is that personal guarantees are generally not required.

The Banks website’s as well as Gov.uk will provide plenty of further background on both of these schemes.

Taking the Tough Decisions Early

Modelling your forward cash flow shows the pressure points on the cash flow and may prompt the need for some tough decisions. Timing is key if you anticipate reduced business levels over the short term. Cutting costs early means that cash can be preserved to be used to fund growth activities. A thorough review of overheads is the first priority; can particular purchases/services be stopped or trimmed? Cost cutting should certainly be applied to areas that are “nice to have” rather than absolutely essential.

Staff is often the biggest area of spend, so needs particular attention. Many companies have taken advantage of the Government’s furlough scheme, but this is starting to reduce. This change must be anticipated, and a hard look will need to be directed at whether you will need the existing staffing levels to meet the expected level of sales. Redundancies are never an easy option, but the future viability of the business may mean that they are necessary.

Investing for the Future

In difficult times, investing for the future is an equally tough call. Adapting to the “new normal” means there will be new opportunities to grow the business as the lock-down subsides. So, a complete review and refresh of the company’s marketing and sales activity is essential. Even if activity levels are low, make sure you keep in touch with customers. I’ve seen a number of my clients reach out to customers to help support them through the current difficulties – which was very well received and has created some new sales opportunities. Spend time to sharpen and clarify your marketing propositions and increase levels of contact, so as the recovery gathers pace, customers will remember your business.

In Conclusion….

Business planning is not easy in times of huge uncertainty – but it is massively important. Cash is the ultimate measure of business performance, so look ahead to help understand (early) what crucial decisions will need to be made.

CMC Partners have a huge level of experience in this area, so please don’t hesitate to contact us if you would need help with your future planning. Any initial call will not be chargeable.

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