Who should business leaders speak to when assessing their cashflow?
Lisa: A cashflow assessment should consider all parts of an organisation, particularly sales and procurement. These teams will have the best insight on what the sales pipeline looks like, and how much resource or supplies will be needed to service future orders, which directly impacts cashflow.
We often see that in larger businesses, there is less awareness of cashflow, not from the central finance functions, but from the key players who affect cashflow – those buying or selling on behalf of the company. Sales and procurement teams in larger businesses may not have a good understanding of their business’s cashflow because it doesn’t impact them on a day-to-day basis, but the decisions they take directly affect cashflow. Similarly, in their roles they may not have the same emotional attachment, or personal oversight of the company’s cash as the owner of a small business might. The value of liquidity should be communicated clearly across any business so that everyone can see both the relevance and importance it has to their roles.
How often should cashflow be reviewed or forecasted?
Lisa: It’s important to recognise that forecasting is not a one-off exercise; the cash forecast should be refreshed, and variances of actual cash flows compared to the most recent forecast should be analysed either every week or every two weeks. This allows you to not only assess how accurate your plan/forecast was, but also improve your forecasting process and your accuracy going forward. It’s important to ask: did your cashflow perform as you intended and expected? If not, why not and what did you learn? How can you make it more accurate in future?
Typically, you should start to see the accuracy of the forecast improve over the course of the first four iterations; this is when the forecast becomes a useful tool for planning and decision-making. At this point, the various parts of the business that provide input into the cashflow forecast will have become used to the process and the rhythm of forecasting, and have had time to observe how it may impact the decisions that the business takes. It can also be useful to include details of the top overdue customer accounts in the weekly reporting to make sure progress is made in collecting these debts.
Instilling a transparent approach to cashflow management can bring together a business, get the organisation sharing information that they might not necessarily have shared before. It can give everyone an improved understanding of the impact that their decisions have on other functions, on the overall financial and cash performance of the business and on how different projects might be funded.
Why wouldn’t a business already be looking at its cashflow forecasts?
Lisa: We find that the businesses which don’t regularly forecast their cash position, or haven’t done so historically, are those where liquidity and access to cash has not been an issue. These businesses have typically performed well and have been able to obtain debt or equity finance to fund their strategy. It’s usually only when cash is not readily available, either because of expansion plans or poor financial performance, that businesses truly focus on cashflow forecasting. By making strong cashflow forecasting a key part of the business planning process, businesses are able to become more resilient to challenges, and to “course correct” if required. The comfort of a healthy cash position is important if a business needs to change tack, pivot to new products and markets, take advantage of acquisition opportunities or survive economic difficulties or disruptions like COVID-19.
Does the pandemic make forecasting accurately into next year more challenging?
Lisa: You always make assumptions about the future when forecasting; it’s just that the uncertainties are different. What challenging economic conditions do is underline the importance of cash forecasting. An important element here is changing the underlying assumptions in the forecast to see how volatile available liquidity is in different scenarios. Evaluating how much the economic situation has to change before your cash position forces you to make significantly different business decisions can be very valuable.
In more challenging economic conditions, holding on to cash is important. In difficult periods, we see debt levels rising and business owners taking steps to reduce costs. Managing liquidity tightly gives business owners the time and the money, to survive through a tough trading environment and remain competitive.
What is the one piece of advice you could offer to a business leader when considering their cashflow management?
Lisa: In finance, there are some old and well-worn adages, one being that a forecast is always going to be wrong. The important thing to understand is why the forecast was wrong, to learn from the errors and to do a better job next go around. Even if you are wrong, you are in a stronger position than your competitor who didn’t produce a forecast at all and didn’t see the cliff edge coming.
