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#Corporate Finance #Corona #Cashflow

How do you forecast your company’s cash flow?

Monday 20/04/2020

In order to ensure your company has the necessary cash to meet its obligations and to avoid funding issues, cash flow forecasting is a great help in assisting you with managing liquidity and providing vision. Particularly in times of crisis, cash forecasting strengthens your decision-making process, identifies potential shortfalls and cash needs, and gives you the opportunity to proactively manage obstacles.

  • Do you have the right tools to manage your company’s liquidity?
  • How do you use a rolling 13-week forecast to strengthen your decision-making?

For the day-to-day operations, there are great techniques that allow you to plot the influx and outflow of cash, have an insight in liquidity and availability, manage short-term needs, and drive medium-term cash management decisions.

The following approaches should be routine practices and familiar drivers of your overall liquidity management:

  • Talk to your major customers and suppliers. Find out what is going on with them and how they will be adjusting to the new realities.
  • Enhance your credit checks. Set and communicate limits, then live by them.
  • Be wary of extraordinary or risk-laden orders or service requests. Get up-front payments or retainers.
  • Spend time every day on collection calls. Have a dedicated process, better yet, a dedicated person to accelerate the collection of receivables.  Don’t let yourself become another’s bank.
  • Resolve billing differences and customer questions quickly.
  • Review vendor payment terms, looking for opportunities to save cash (discounts) or extend payments.
  • Talk to your banker. Know your availability and accessibility to additional funding.

We strongly advise you to review your practices and, when appropriate, enhance them immediately.

Cash in extraordinary circumstances

But what if you find yourself in extraordinary circumstances, when a crisis looms, ‘business as usual’ evaporates and day-to-day management just isn’t enough? Then ensuring there’s sufficient liquidity for the company’s operations is even more of vital concern. Cash forecasting, and particularly a rolling13-week cash flow forecast, proves to be an essential and valuable tool to provide the vision you need to manage your cash flow during turbulent times.

What’s so important about a rolling 13-week cash flow forecast? It provides you by default with an insight from next week to the end of the quarter. It may indeed be less accurate than the information you have on this week or the next, but it is a great instrument that allows you to adjust the forecasts’ underlying assumptions on a weekly basis, creating the ability to adapt instantly to evolving business environments.

Key elements in a proper forecasting:

  • Use history.

Understand past practices and trends in collections and payment terms. What is yet to come seldom is a certainty, but past experiences make a great starting point.

  • Know your ecosystem.

Consider potential changes to your business environment and operations. Talk to your major customers, vendors and competitors and you will get real time information as to what is really going on.

  • Be disciplined.

Be careful and conscientious in your approach to forecasting, reviewing, and updating your financial activity. Forecasts need to be updated real time and be reviewed with your management team and advisor(s). Create the discipline to review and use this information to make real time management decisions.

  • Involve the right people.

Although systems are important, buy-in and engagement of your management team will dictate how successful your cash forecasting process will be. Involve your key people to execute changes of course in order to ensure buy-in.

A rolling cash forecast is a great help in decision-making. Although inherently imprecise, it is not to be seen as a Madame Soleil kind of instrument as it is extremely useful in identifying trends, understanding the approximate timing of cash needs, and as an analytic tool in evaluating operational changes.

Have your management teams discuss the risks they face and the resources they need to avoid potential trouble or pursue opportunities, based on the forecast. By doing so you will create a disciplined focus that helps your company develop and execute the right strategy and plans.

For more information about Corporate Finance, please visit Moore Global Corporate Finance

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Danny Achten
Danny Achten
Partner Corporate Finance | Mid-market M&A