How does your cash, flow?

The answer to this question increasingly seems to be “away from me”.


Due to a combination of factors impacting the economy in recent years, the latest being a rise in interest rates, focus is once again returning to cash management and optimisation.


In many established and stable businesses, the financial reporting function often doesn’t look much beyond the last month’s P&L, with key performance indicators (KPI’s) limited to revenue and profitability. We have all seen historically profitable, large and complex businesses that have operated successfully whilst using less than ideal management information. Yet failure is not limited to those businesses where there has been a seismic shift in its marketplace or have experienced technical obsolescence. In the main, businesses that fail due to inadequate levels of liquidity, will be those with poor operational processes, financial controls and, importantly, management information.


Understanding how cash flows through a business is dependent on having not only great commercial acumen, but also consistent, accurate and timely internal reporting. This extends well beyond a historical P&L and should ideally incorporate a balance sheet, cash flow statement and comparisons to both prior year and budgeted information.


By incorporating more sophisticated budgeting and longer-term forecasting techniques, management are better equipped to monitor variances and understand whether budgeted plans have been met or if trends are starting to slip, prompting investigation. Finance teams should also understand what the normal working capital cycle looks like and take steps to monitor it.  Changes in the normal cycle can be an early indication of an impending cash flow problem - for example, aged receivables or inventory days starting to creep up.


Over committing to capital expenditure or debt service are more obvious situations which can trigger a cash crisis but this type of risk can be mitigated by businesses maintaining a robust financial model, which can be stress tested to ensure any that commitments could be met in less-than-optimal trading scenarios. What can be less obvious, however, is the complexity that intercompany transactions can add to monitoring cash flow.


Group finance teams should maintain strict discipline in ensuring intercompany balances are netted to zero on a regular basis. Furthermore, consideration should also be given to how intercompany trading can skew the working capital cycle, particularly where trading payments and receipts are not cleared by cash. Ever increasing intercompany balances or a failure to correctly recharge central costs can easily mask early indicators of a cash flow problem, only becoming apparent when there is a group wide cash crisis.


The main difference between a company that requires transformation versus a turnaround (i.e. it is becoming stressed or even distressed) is time.


So, what do you do?

  1. Understand how much time you have. More time equals more options.
  2. Understand how you got here – then you can try to reverse it or at least slow it down.
  3. Communicate with stakeholders. Silence breeds nervousness which makes problems bigger.


The creation of a weekly (if not daily) cash flow forecast, extended for a minimum period of 13 weeks will help management to understanding the “cash runway”.

Once this is better understood, management are able to consider their options around how to handle the crisis and how long they have to find a solution before the cash runs out.


Being armed with the data driven facts is a prerequisite. In recent years, technological advances have led to the creation of dashboards (from multiple platforms) showing real time information pulled directly from accounting software. Management teams are then able to proactively manage cash, rather than reacting sometimes weeks after the month end when the management accounts are available. However, these technology driven tools still require processes and controls in place to ensure the end user is viewing the correct information.


Whilst cash flow can appear to be a fait accompli, impacted only by the profits or losses of a business, this is often not the case. There are many different drivers that can be optimised to improve the position.


If you would like to chat with one of our team about how Cortus Advisory Group may be able to help your business please contact James Groot or Charlotte Harrington at