Coming out of Covid: control on cash
A widely held belief is that more businesses go bust coming out of recession than do going into one - the main driver typically being an under anticipation of the working capital required for growth. As we recover out of the pandemic this belief will be tested again.
Overlay this with labour shortages in certain sectors (e.g hospitality), input shortages in others (e.g. construction), associated inflationary pressures and increased unpredictability in demand. The result is that forecasting the level of cash/facility required to trade as we recover from the last 18 months is more difficult than ever.
As always ‘Cash is King’ and in order to take advantage of growth opportunities whilst remaining confident there are sufficient funds to trade, a robust 13 or 26 week rolling cash flow is critical to ensure you have visibility of cash headroom.
However, it is not just the forecast that is important, but also the behaviours that feature in the process. A finance team can only influence cash so much - for example by putting more pressure on credit control or the closing the cheque book. For an organisation to have a really good grip on cash, those individuals or teams around the business that influence cash must input into the process. For example:
- Sales teams – What is the latest view of forecast sales? What terms are being agreed with customers? Have terms been renegotiated or discounts been applied without that information being communicated back to the finance team?
- Procurement teams – What inventory has been committed to? How do we know we are not committing to more than we need? Can we move to just in time? Are there inventory lines that we need to exit?
- Purchasing – What terms are we agreeing to with our suppliers? Are early discount settlements available? Would delaying receiving goods for a couple of days help our cash position?
Changing behaviour: the Hawthorne effect
As individuals or teams around the organisation become involved in the cash management process and are held to account on the assumptions made, those individuals or teams become aware they are being observed and the Hawthorne’s effect* begins to manifest. In turn their behavior’s often change for the better and the accuracy of the forecast improves.
Unless headroom is critically tight, the tail (cash) should never wag the dog (profit) but having a renewed focus on cash management and forecasting will allow for much improved planning around the level of cash required going forwards.
Cashflow modelling with Cortus Advisory Group
The introduction of, or better discipline around the following forms the basis of our approach:
- > We help you develop a ‘fit for purpose’ financial model which is capable of being diligenced (whether or not it is required)
- > We undertake cross functional discussions to gain input into the forecast from around the business
- > We lead with the data aiming to make the forecast cash flow as automated as possible to drive efficiency in the forecasting process
- > We undertake regular (weekly) variance analysis and assess why a variance has occurred e.g. culture, supplier pressure
- > We ensure our cash flow models have built in functionality capable of running different scenarios
Why work with us?
- Because we bring capacity - building a new model and managing a new approach is most time consuming at the start and we can ease that burden, with the aim to hand over to management as soon as possible and once the routine is established.
- Because we bring capability – put simply we have substantial experience of implementing short term cash flow forecasts across all sizes of business and have experience of the myriad of issues and complexities that can arise.
Even outside of stressed situations, having a robust short term cash flow that provides control and visibility of working capital is vital. Being able to assess what cash is needed and by when will become a priority as the economy begins to recover from the impact of the pandemic.
The sooner a business gets on top of cash forecasting, the more time, and therefore options, are available - particularly if additional facilities are required.
*The Hawthorne Effect: when people behave differently because they know they are being watched.
James Groot leads the Corporate Advisory team at Cortus – you can contact him at firstname.lastname@example.org
For further information about Cortus Advisory Group go to www.cortusadvisory.co.uk