As we approach the next month, focusing on short and medium-term cash and liquidity management will increase in importance. Plotting the inflows and outflows of cash, understanding liquidity and availability, managing short-term needs, and driving medium-term cash management decisions, may require a shift in focus from tracking profits to ensuring there is sufficient liquidity for the company’s operations.
There are a number of routine practices that should be reviewed and, when appropriate, enhanced immediately, they include:
- 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.
These are great techniques for managing the day to day. However, to provide the vision and tools you will need to manage the your cash flow during turbulent times, cash forecasting, particularly a rolling 13-week cash flow forecast, is an essential and valuable tool.
The primary objective of cash flow forecasting is to assist you with managing liquidity and providing vision as to whether the business has the necessary cash to meet its obligations and avoid funding issues. Proper use of cash forecasting strengthens your decision making process, identifies potential shortfalls and cash needs, and provides you with the opportunity to proactively manage potential issues.
A rolling 13-week forecast provides you with this vision from next week to the end of a quarter. While the most accurate information is this week or next, the rolling forecast allows you to adjust the forecasts underlying assumptions on a weekly basis, creating the ability to adjust real time to evolving business environments.
Forecasting requires a number key elements:
- Understanding of past practices and trends in collections and payment terms. While what happens next is not a certainty, using your past history as a baseline is a great starting point.
- Consideration of potential changes to the business environment and operations. Talking to your major customers, vendors, and competitors will give you real time information as to what is going on in your ecosystem.
- Disciplined approach to forecasting, reviewing, and updating your financial activity. Forecasts need to be updated real time for information that becomes apparent as the weeks go by. Setting up a set time to review with your management team and advisor(s) creates the discipline to review and utilize this information to make real time management decisions.
- Getting the right people involved. Although systems are important, buy-in and engagement of your management team will dictate how successful your cash forecasting process will be. Involving your key people who will be execute on changes in direction will ensure buy-in.
The real value with rolling cash forecast is in using it as a decision-making tool. While forecasting is an inherently imprecise activity, it is extremely useful in identifying trends, understanding the approximate timing of cash needs, and as an analytic tool in evaluating operational changes.
Forecasts do not have to be accurate to be worth the trouble of creating and maintaining them. By elevating the importance of having your management teams discuss the risks they face and consider the resources needed to avoid or mitigate issues or pursue opportunities that might emerge, you will have created a disciplined focus on helping your company develop and execute a plan for situations that may arise.
This article was written by Richard DeRienzo, from Citrin Cooperman, an independent firm associated with the Moore Global Network. © 2020 All rights reserved. Used with permission.
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